federal communications commission fcc 18-146 before the … · 2018. 10. 25. · federal...

Federal Communications Commission FCC 18-146

Before theFederal Communications Commission

Washington, D.C. 20554

In the Matter of

Regulation of Business Data Services for Rate-of-Return Local Exchange Carriers

))))

WC Docket No. 17-144

Business Data Services in an Internet Protocol Environment

Special Access for Price Cap Local Exchange Carriers

)))))

WC Docket No. 16-143

WC Docket No. 05-25

REPORT AND ORDER, SECOND FURTHER NOTICE OF PROPOSED RULEMAKING, AND FURTHER NOTICE OF PROPOSED RULEMAKING

Adopted: October 23, 2018 Released: October 24, 2018

Comment Date: [45 days after date of publication in the Federal Register]Reply Comment Date: [75 days after date of publication in the Federal Register]

By the Commission: Chairman Pai and Commissioners O’Rielly and Carr issuing separate statements; Commissioner Rosenworcel concurring and issuing a statement.

TABLE OF CONTENTS

Para.

I. INTRODUCTION...................................................................................................................................1II. BACKGROUND.....................................................................................................................................7III. AN ADMINISTRABLE FRAMEWORK FOR BUSINESS DATA SERVICES OFFERED

BY RATE-OF-RETURN CARRIERS THAT RECEIVE FIXED SUPPORT .....................................16A. Transitioning to a New Framework ................................................................................................19B. Applying Voluntary Incentive Regulation to Electing Carriers’ Lower Speed TDM

Transport and End User Channel Termination Services.................................................................311. Initial Rate Levels.....................................................................................................................332. Category Relationships Unfreeze .............................................................................................453. Special Access Basket, Categories, and Subcategories............................................................604. Productivity X-factor and Measure of Inflation .......................................................................615. Exogenous Costs ......................................................................................................................706. Low-end Adjustment ................................................................................................................737. Pricing Flexibility for Lower Capacity TDM Transport and End User Channel

Termination Services................................................................................................................77C. Removal of Ex Ante Pricing Regulation of Lower Capacity TDM End User Channel

Termination Services in Areas Deemed Competitive.....................................................................781. Criteria for a Competitive Market Test ....................................................................................822. Competitive Market Test Methodology ...................................................................................903. Declining to Use the Results of the Price Cap Competitive Market Test ................................944. Updating Competitive Market Test Results ...........................................................................1035. Removal of Ex Ante Pricing Regulation of Electing Carriers’ Lower Capacity TDM


2

End User Channel Termination Services ...............................................................................105D. Ending Ex Ante Pricing Regulation for Electing Carriers’ Packet-Based and Higher

Capacity TDM BDS Offerings .....................................................................................................106E. Implementation Issues ..................................................................................................................116

1. Effective Date of Elections.....................................................................................................1172. Implementing Forbearance.....................................................................................................1203. GAAP Accounting .................................................................................................................1384. Transitions ..............................................................................................................................140

IV. OTHER RULE CHANGES ................................................................................................................146V. SECOND FURTHER NOTICE OF PROPOSED RULEMAKING AND FURTHER

NOTICE OF PROPOSED RULEMAKING .......................................................................................147A. Eliminating Ex Ante Pricing Regulation of TDM Transport Services Provided by Price

Cap Carriers ..................................................................................................................................148B. Eliminating Ex Ante Pricing Regulation of Lower Capacity TDM Transport Provided by

Carriers that Receive Fixed Universal Service Support and Elect Incentive Regulation for Their BDS Offerings.....................................................................................................................157

VI. PROCEDURAL MATTERS...............................................................................................................163VII. ORDERING CLAUSES.....................................................................................................................170

APPENDIX A – Rules APPENDIX B – Proposed Rules APPENDIX C – Final Regulatory Flexibility AnalysisAPPENDIX D – Initial Regulatory Flexibility Analysis

I. INTRODUCTION

1. Today, we continue the process the Commission began in 1990 to allow and encourage carriers to move from inefficient, burdensome cost-based regulation to incentive regulation that promotes efficiency, reduces regulatory burdens, and encourages competition. In this next-in-a-series of steps, we focus on allowing rate-of-return carriers that currently receive model-based or other forms of fixed high-cost universal service support to voluntarily elect to transition their business data services (BDS) offerings out of rate-of-return regulation.1

2. The term business data services refers to the “dedicated point-to-point transmission of data at guaranteed speeds and service levels using high-capacity connections.”2 BDS offerings are fundamentally important to modern communities and economies. Businesses, non-profit organizations, and government institutions use BDS to enable secure and reliable transfer of data, as a means of connecting to the Internet or the cloud, and to create private or virtual private networks. Increasing demand for bandwidth hungry applications is making lower speed circuit-based BDS offerings such as DS1s and DS3s obsolete and driving increasing demand for generally higher speed packet-based services provided over fiber. Last year, the Commission recognized the “dynamic competitive realities” of the BDS market and streamlined its regulation of price cap carriers’ BDS to promote long-term innovation and investment.3

1 Rate-of-return carriers eligible to elect this transition include those that receive universal service support based on the Alternative Connect America Cost Model (A-CAM carriers), those that receive fixed support under the Commission’s Alaska Plan (Alaska Plan carriers), those that are affiliated with price-cap carriers and those that accept future offers of A-CAM support or otherwise transition away from legacy support mechanisms in the future. 2 See 47 CFR § 69.801(a). 3 Business Data Services in an Internet Protocol Environment; Technology Transitions; Special Access for Price Cap Local Exchange Carriers; AT&T Corporation Petition for Rulemaking to Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services, WC Docket Nos. 16-143, 05-25, GN Docket No. 13-5, RM-10593, Report and Order, 32 FCC Rcd 3459, 3461, para. 3 (2017) (BDS Order), remanded in part


3

3. As part of allowing rate-of-return carriers receiving fixed high-cost universal service support to elect a lighter touch regulatory framework for their BDS offerings, we permit such carriers to move their lower capacity time division multiplex (TDM) circuit-based transport4 and end user channel termination offerings (at a DS3 bandwidth level or below) to incentive regulation while providing a path for those carriers that elect our new framework (electing carriers) to demonstrate that their lower capacity circuit-based end user channel termination offerings are competitive, and therefore should not be subject to ex ante pricing regulation. We also release from ex ante pricing regulation electing carriers’ packet-based and higher capacity (above a DS3 bandwidth level) circuit-based BDS offerings.

4. Allowing rate-of-return carriers that receive fixed high-cost support to move their BDS offerings to a lighter touch regulatory framework will help drive competition for BDS offerings in the communities served by those carriers. It will also reduce unnecessary regulatory burdens faced by those carriers that elect the new regulatory framework. Under the framework we adopt today, electing carriers will not be required to provide cost-based justifications for their BDS rates and will therefore no longer need to conduct annual cost studies to justify those rates. They will also no longer be required to file tariffs for their packet-based and higher-capacity TDM services and for their lower capacity TDM end user channel termination offerings in areas deemed competitive by the competitive market test we adopt today. Electing carriers will be able to pass those cost savings on to their customers or use them to upgrade their networks.

5. The current record does not provide us with sufficient information to determine, at this time, whether to take additional deregulatory steps with respect to the transport element of BDS provided by electing carriers. We therefore also adopt a further notice of proposed rulemaking seeking comment on further deregulating transport services provided by electing carriers (Further Notice). We also take this opportunity to issue a second further notice of proposed rulemaking (Second Further Notice) relating to the TDM transport element of BDS services offered by price cap carriers. In the Second Further Notice we propose to eliminate ex ante pricing regulation of TDM transport services offered by price cap carriers and seek comment on that proposal.

6. We take these steps while affirming our core statutory obligations pursuant to sections 201, 202, and 208 of the Communications Act to ensure that the rates and practices of these carriers’ BDS offerings remain just, reasonable and not unreasonably discriminatory.5 Collectively, these actions will streamline regulation, and spur entry, investment, innovation, and competition in the affected BDS markets to the benefit of businesses and other institutional users that increasingly rely on these services.

II. BACKGROUND

7. In 1990, the Commission began the process of encouraging carriers to move from rate-of-return to incentive regulation by adopting price cap rules governing the largest incumbent LECs’ interstate access charges and allowing other incumbent LECs to elect price cap regulation voluntarily.6

(Continued from previous page) sub nom., Citizens Telecomms. Co. of Minn., LLC v. FCC, 901 F.3d 991 (8th Cir. Aug. 28, 2018) (Citizens Telecomms. v. FCC). 4 We use the terms “transport” and “TDM transport” to refer to interoffice facilities and channel terminations between an incumbent local exchange carrier’s (LEC) serving wire center and an interexchange carrier (IXC), services covered by section 69.709(a)(4) of the Commission’s rules. It excludes the elements of that rule that cover switched access services, such as entrance facilities, dedicated transport facilities between the serving wire center and the tandem switching office, and direct-trunked transport. See 47 CFR § 69.709(a)(4); see also BDS Order, 32 FCC Rcd at 3496, n.258. 5 See 47 U.S.C. §§ 201, 202 & 208. 6 See Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87-313, Second Report and Order, 5 FCC Rcd 6786, 6818, paras. 257-59 (1990) (Price Cap Order) (limiting mandatory price cap regulation to “the eight largest LECs”). The Commission required the Regional Bell Operating Companies (the local exchange carrier (LEC) entities that resulted from the divestiture of AT&T in 1984) and the GTE Operating Company to comply with the new price cap regulations and permitted other LECs to elect price cap regulation voluntarily, provided that all


4

Price cap regulation was designed to “reward companies that became more productive and efficient, while ensuring that productivity and efficiency gains are shared with ratepayers.”7 Through a series of subsequent decisions, the Commission allowed other carriers to convert voluntarily from rate-of-return to price cap regulation.8

8. Since then, the Commission has taken additional steps to transition certain services and revenues of rate-of-return carriers from rate-of-return regulation to other more efficient forms of regulation. In 2011, as part of comprehensive universal service and intercarrier compensation reform, the Commission imposed rate caps on rate-of-return carriers’ switched access services, removing those services from the obligations that accompany traditional rate-or-return regulation.9 In the USF/ICC Transformation Order, the Commission also changed its method for calculating high-cost universal service support received by rate-of-return affiliates of price cap carriers. Specifically, the Commission began to treat rate-of-return operating companies affiliated with price-cap holding companies as price cap LECs for the purposes of the Connect America Fund (CAF) Phase I distribution mechanism.10 As a result, rate-of-return carriers affiliated with price-cap companies now receive the same type of fixed universal service support that their price cap affiliates receive.

9. Two years ago, the Commission gave rate-of-return carriers the option of receiving forward looking, model-based universal service support based on the Alternative Connect America Cost Model (A-CAM), which more than 200 carriers opted to receive (A-CAM carriers).11 The Commission

(Continued from previous page) their affiliates also convert to price cap regulation and that they withdraw from the pricing pools administered by the National Exchange Carrier Association (NECA). Id. Most rural and smaller LECs elected to remain subject to rate-of-return regulation. 7 Price Cap Order, 5 FCC Rcd at 6787, para. 1. 8 See, e.g., Windstream Petition for Conversion to Price Cap Regulation and for Limited Waiver Relief, WC Docket No. 07-171, Order, 23 FCC Rcd 5294 (2008) (Windstream Price Cap Conversion Order); Petition of Puerto Rico Telephone Company, Inc. for Election of Price Cap Regulation and Limited Waiver of Pricing and Universal Service Rules; Consolidated Communications Petition for Conversion to Price Cap Regulation and for Limited Waiver Relief; Frontier Petition for Limited Waiver Relief upon Conversion of Global Valley Networks, Inc., to Price Cap Regulation, WC Docket Nos. 07-292, 07-291, 08-18, Order, 23 FCC Rcd 7353 (WCB 2008) (Consolidated Price Cap Conversion Order); ACS of Alaska, Inc., ACS of Anchorage, Inc., ACS of Fairbanks, Inc. and ACS of the Northland, Inc., Petition for Conversion to Price Cap Regulation and Limited Waiver Relief, WC Docket No. 08-220, Order, 24 FCC Rcd 4664 (WCB 2009) (ACS Price Cap Conversion Order); CenturyTel, Inc., Petition for Conversion to Price Cap Regulation and Limited Waiver Relief, WC Docket No. 08-191, Order, 24 FCC Rcd 4677 (WCB 2009) (CenturyTel Price Cap Conversion Order). 9 Connect America Fund; A National Broadband Plan for Our Future; Establishing Just and Reasonable Rates for Local Exchange Carriers; High-Cost Universal Service Support; Developing a Unified Intercarrier Compensation Regime; Federal-State Joint Board on Universal Service; Lifeline and Link-Up; Universal Service Reform – Mobility Fund, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-45, GN Docket No. 09-51, WT Docket No. 10-208, Report and Order and Further Notice of Proposed Rulemaking, 26 FCC Rcd 17663, 17932, para. 798 (2011) (USF/ICC Transformation Order and/or USF/ICC FNPRM), aff’d sub nom., In re: FCC 11-161, 753 F.3d 1015 (10th Cir. 2014); see also Petition for Rulemaking of ITTA and USTelecom, WC Docket No. 17-144 at 3 (filed May 25, 2017) (Joint Petition) (“the USF-ICC Transformation Order made costs irrelevant to the computation of switched access charges”). 10 USF/ICC Transformation Order, 26 FCC Rcd at 17713, para. 129; 47 CFR § 54.312(a). 11 See Connect America Fund et al., WC Docket No. 10-90 et al., Report and Order, Order and Order on Reconsideration, and Further Notice of Proposed Rulemaking, 31 FCC Rcd 3087, 3094-3117, para. 17-90 (2016) (2016 Rate-of-Return Reform Order or FNPRM); see also Connect America Fund, WC Docket No. 10-90, Report and Order and Further Notice of Proposed Rulemaking, 31 FCC Rcd 13775, 13776, para. 5 (2016) (A-CAM Revised Offer Order); Wireline Competition Bureau Authorizes 182 Rate-of-Return Companies to Receive $454 Million Annually in Alternative Connect America Cost Model Support to Expand Rural Broadband, WC Docket No. 10-90, Public Notice, 32 FCC Rcd 842 (WCB 2017) (PN Authorizing 182 Rate-of-Return Carriers to Receive A-CAM Support); Wireline Competition Bureau Authorizes 35 Rate-of-Return Companies to Receive More than $51 Million


5

observed that “the carriers that choose to take the voluntary path to the model are electing incentive regulation for common line offerings.”12 Consequently, for A-CAM carriers, only their BDS offerings are currently subject to rate-of-return regulation.

10. In 2016, the Commission also adopted the Alaska Plan Order, which allowed Alaskan rate-of-return carriers to elect fixed universal service support on a state-wide basis for a defined term in exchange for committing to deployment obligations.13 Specifically, the Commission provided a one-time opportunity for Alaskan rate-of-return carriers to elect to receive universal service support frozen at adjusted 2011 levels for a 10-year term in exchange for meeting individualized performance benchmarks to offer voice and broadband services.14 Subsequently, in 2016, the Wireline Competition Bureau (Bureau) authorized 13 Alaskan rate-of-return carriers to receive universal service support under the Alaska Plan (Alaska Plan carriers).15 Similar to A-CAM carriers, Alaska Plan carriers receive fixed universal service support that is not based on current cost, and only file cost studies for purposes of their BDS offerings.16

11. In addition to encouraging carriers to migrate from cost-based to incentive regulation, over time the Commission has reduced ex ante pricing regulation in favor of relying on competition to the extent possible.17 In 1999, the Commission granted pricing flexibility to price cap carriers that provided service in areas where carriers could demonstrate threshold levels of deployment by competitive providers.18 Pricing flexibility allowed eligible carriers to offer BDS using contract tariffs, volume and term discounts and, in markets that demonstrated higher levels of competition, at unregulated rates.19 Beginning in 2007, the Commission granted forbearance from dominant carrier regulation, including tariffing and pricing regulation, to a number of price cap incumbent LECs for their newer packet-based broadband services.20 These forbearance orders concluded that forbearance from dominant carrier

(Continued from previous page) Annually in Alternative Connect America Cost Model Support and Announces Offers of Revised A-CAM Support Amounts to 191 Rate-of-Return Companies to Expand Rural Broadband, WC Docket No. 10-90, Public Notice, 31 FCC Rcd 13328, 13328, para. 1 (WCB 2016) (A-CAM Revised Offer Public Notice). 12 2016 Rate-of-Return Reform Order, 31 FCC Rcd at 3097, para. 21. 13 47 CFR § 54.306; Connect America Fund; Universal Service Reform – Mobility Fund; Connect America Fund – Alaska Plan, WC Docket Nos. 10-90, 16-271, WT Docket No. 10-208, Report and Order and Further Notice of Proposed Rulemaking, 31 FCC Rcd 10139, 10142, para. 6 (2016) (Alaska Plan Order) 14 See id. at 10142, para. 6.15 Wireline Competition Bureau Authorizes Alaska Plan Support for 13 Alaskan Rate-of-Return Companies, WC Docket Nos. 10-90 and 16-271, Public Notice, 31 FCC Rcd 13347, 13350, Appx. A (WCB 2016) (Alaska Plan Carriers Authorization Public Notice).16 See Alaska Plan Order, 31 FCC Rcd at 10154, para. 46. 17 See, e.g., BDS Order, 32 FCC Rcd at 3499, para. 8.18 See Access Charge Reform et al., CC Docket No. 96-262 et al., Fifth Report and Order and Further Notice of Proposed Rulemaking, 14 FCC Rcd 14221 (1999) (Pricing Flexibility Order), aff’d, WorldCom v. FCC, 238 F.3d 449 (D.C. Cir. 2001).19 See id. at 14261-302, paras. 77-158. 20 See, e.g., Petition of AT&T Inc. for Forbearance Under 47 U.S.C. § 160(c) from Title II and Computer Inquiry Rules with Respect to Its Broadband Services; Petition of BellSouth Corp. for Forbearance Under Section 47 U.S.C. § 160(c) from Title II and Computer Inquiry Rules with Respect to Its Broadband Services, WC Docket No. 06-125, Memorandum Opinion and Order, 22 FCC Rcd 18705, 18707, para. 3 (2007) (AT&T Forbearance Order); Petition of the Embarq Local Operating Companies for Forbearance Under 47 U.S.C. § 160(c) from Application of Computer Inquiry and Certain Title II Common-Carriage Requirements; Petition of the Frontier and Citizens ILECs for Forbearance under Section 47 U.S.C. § 160(c) from Title II and Computer Inquiry Rules with Respect to Their Broadband Services, WC Docket No. 06-147, Memorandum Opinion and Order, 22 FCC Rcd 19478 (2007) (Embarq/Frontier Forbearance Order), aff’d sub nom. Ad Hoc v. FCC¸ 572 F.3d 903 (2009); Qwest Petition for


6

regulation was warranted given the existence of competition for these newer services, which ensured that rates and practices for these services remained just and reasonable, adequately protected consumers, and was in the public interest.21

12. In 2017, the Commission adjusted BDS pricing regulation to the reality of a dynamically competitive BDS market in areas where incumbent LECs were subject to price cap regulation.22 The Commission premised its reductions in ex ante pricing regulation in part on a substantial data collection and in part on its predictive judgment that dynamic and growing competition in the BDS market, driven increasingly by the emergence of cable competition, would allow reliance on competition rather than regulation to ensure rates remain just and reasonable.23 The BDS Order represented yet another step in the process of reducing dominant carrier regulation in response to the growth of competition. In that order, the Commission found that reducing government intervention and allowing market forces to continue working would further spur entry, innovation, and competition in BDS markets served by price cap carriers.24 The Commission applied ex ante pricing regulation “only where competition is expected to materially fail to ensure just and reasonable rates” and stated its preference to rely “on competition rather than regulation, wherever purchasers can realistically turn to a supplier beyond the incumbent LEC.”25 Based on the record before it,26 the Commission found that, on balance, competition was sufficient to ensure just and reasonable rates for packet-based business data services, TDM transport services, and higher bandwidth (i.e., above a DS3-level) TDM services (including OCn services) in the absence of ex ante pricing regulation in areas served by price cap carriers.27 It also adopted a competitive market test for lower bandwidth TDM end user channel terminations (i.e., DS3-level and lower) in price cap areas and refrained from ex ante pricing regulation of those services in areas deemed competitive by that test.28

13. Recently, the Eighth Circuit Court of Appeals upheld all aspects of the BDS Order save the portions of the order affecting price cap carriers’ TDM transport service, which it vacated and remanded on notice grounds—namely that the Commission had not provided sufficient notice that it

(Continued from previous page) Forbearance Under 47 U.S.C. § 160(c) from Title II and Computer Inquiry Rules with Respect to Broadband Services, WC Docket No. 06-125, Memorandum Opinion and Order, 23 FCC Rcd 12260 (2008) (Qwest Forbearance Order); Petition of ACS of Anchorage, Inc. Pursuant to Section 10 of the Communications Act of 1934, as Amended (47 U.S.C. §160(c)), for Forbearance from Certain Dominant Carrier Regulation of Its Interstate Access Services, and for Forbearance from Title II Regulation of Its Broadband Services, in the Anchorage, Alaska, Incumbent Local Exchange Carrier Study Area, WC Docket No. 06-109, Memorandum Opinion and Order, 22 FCC Rcd 16304 (2007) (ACS Forbearance Order). 21 AT&T Forbearance Order, 22 FCC Rcd at 18726, para. 35. 22 See generally BDS Order. 23 BDS Order, 32 FCC Rcd at 3462, paras. 3-4.24 Id. at 3462, para. 5. 25 Id. at 3499, para. 86. 26 The record included the Commission’s collection of data from providers and purchasers of special access services (herein referred to as 2015 Collection) as part of the Commission’s business data services (formerly special access) rulemaking. See id. at 3466, para. 10; Business Data Services et al., WC Docket No. 16-143 et al., Tariff Investigation Order and Further Notice of Proposed Rulemaking, 31 FCC Rcd 4723, 4737-43, paras. 29-37, 39-43 (2016) (BDS FNPRM), agency’s request for voluntary remand granted sub nom., AT&T, Inc., et al. v. FCC, Nos. 16-1145, 16-1166, 16-1177 (D.C. Cir. Aug. 29, 2017) (in-depth discussion on the 2015 Collection); see also FCC, Special Access Data Collection Overview, www.fcc.gov/general/special-access-data-collection-overview-0 (last visited Oct. 23, 2018). 27 BDS Order, 32 FCC Rcd at 3499-500, paras. 86-87; see generally Graeme Guthrie, Regulating Infrastructure: The Impact on Risk and Investment, 44 J. Econ. Literature 925 (2006). 28 BDS Order, 32 FCC Rcd at 3499-500, paras. 86-87.

http://www.fcc.gov/general/special-access-data-collection-overview-0


7

might relieve those services of ex ante pricing regulation.29

14. After the Commission adopted changes to its rules governing price cap carriers’ BDS offerings, ITTA and USTelecom (together, Petitioners) filed a petition seeking the same regulatory treatment of BDS offerings for rate-of-return carriers receiving fixed support as that the Commission had recently adopted for price cap carriers (Joint Petition).30 According to Petitioners, rate-of-return regulation deters investment in networks and harms competition.31 Petitioners argue that the inflexibility of rate-of-return regulation makes it difficult to justify and fund upgrades to their rural networks.32 They point out that for rate-of-return carriers, “the need to perform annual cost studies now applies only with respect to BDS.”33 As a result, they argue that the expense associated with conducting cost studies and complying with other rate-of-return expenses are difficult to recover and burden rate-of-return carriers receiving fixed support but not their competitors.34 The Bureau sought and received comment on the Joint Petition.35

15. Upon review of the record received in response to the Joint Petition, earlier this year, the Commission released a notice of proposed rulemaking (Notice) proposing to allow A-CAM and other rate-of-return carriers that receive fixed universal service support to voluntarily migrate their lower speed TDM-based BDS offerings to incentive regulation.36 The Commission also sought comment on adopting a competitive market test to determine when the market for lower speed TDM-based BDS offerings offered by rate-of-return carriers that receive fixed support are sufficiently competitive to justify eliminating ex ante pricing regulation of such offerings. Additionally, the Notice sought comment on eliminating ex ante pricing regulation for such carriers’ packet-based and higher speed TDM-based BDS offerings nationwide, while maintaining oversight authority through sections 201, 202 and 208 of the Communications Act of 1934, as amended (the Communications Act or the Act) to ensure BDS rates and practices remain just and reasonable.37

III. AN ADMINISTRABLE FRAMEWORK FOR BUSINESS DATA SERVICES OFFERED BY RATE-OF-RETURN CARRIERS THAT RECEIVE FIXED SUPPORT

16. Upon review of the record, we allow rate-of-return carriers receiving fixed universal service support to choose to migrate their BDS offerings to a new, comprehensive, lighter-touch regulatory framework that is better aligned to the competitive realities of the BDS markets they serve. The framework we adopt includes voluntary incentive regulation with pricing flexibility for electing carriers’ lower capacity (DS3 and below) TDM transport and end user channel termination services. We also adopt a competitive market test for such carriers’ lower capacity TDM end user channel termination services to identify competition by study area. In electing carriers’ study areas that the competitive market test deems competitive, we eliminate ex ante pricing regulation for lower capacity TDM end user channel termination services. We also remove ex ante pricing regulation from electing carriers’ packet-

29 See Citizens Telecomms. v. FCC, 901 F.3d at 1004-06.30 See generally Joint Petition. 31 Id. at 4. 32 Id. 33 Id. at 2-4. 34 Id. at 3. 35 Wireline Competition Bureau Seeks Comment on Petition for Rulemaking Regarding Regulation of Business Data Services for Model-Based Rate-of-Return Carriers, WC Docket No. 17-144, Public Notice, 32 FCC Rcd 4701 (2017) (2017 Public Notice). 36 Regulation of Business Data Services for Rate-of-Return Local Exchange Carriers, WC Docket No. 17-144, Notice of Proposed Rulemaking, FCC 18-46, at 2, para. 1 (rel. April 18, 2018) (Notice). 37 Id.


8

based and higher capacity (above a DS3 bandwidth level) TDM services and grant forbearance from tariffing requirements for those services. To reduce the burden of legacy rate-of-return regulation on electing carriers, we also grant forbearance from cost assignment and separations rules and related reporting requirements, because we determine that such action is warranted by the non-cost-based regulation that will apply to electing carriers and the competitive circumstances of their BDS markets.

17. We find that adopting the lighter-touch incentive regulatory framework proposed by the Commission for electing carriers will remove unnecessary regulatory burdens and encourage competition.38 Based on the record before us, we decline at this time to relieve electing carriers’ lower capacity TDM transport (at or below a DS3-level) of ex ante pricing regulation nationwide, as Petitioners sought. Instead we allow electing carriers to move their lower speed TDM transport services to incentive regulation and seek further comment on a path to further deregulation of those services in the accompanying Further Notice. Additionally, we adopt a competitive market test tailored to rate-of-return carriers’ study areas, which will allow us to properly evaluate competition in the areas served by electing carriers and remove ex ante pricing regulation for end user channel terminations in areas deemed competitive, instead of basing our decision on the competitive characteristics of areas served by price cap carriers.

18. We decline to adopt Petitioners’ proposal to apply to electing carriers’ BDS offerings the regulatory framework and the results of the price cap competitive market test adopted in the BDS Order for price cap carriers’ BDS offerings.39 Petitioners argue that applying the price cap BDS rules to electing rate-of-return carriers would result in regulatory parity that “would promote competition and make the rules less complex.”40 TDS Telecom asserts that adopting a separate incentive regulatory framework is unnecessary.41 The price cap BDS rules, however, were based on an analysis of BDS competition in areas served by price cap carriers, consistent with our obligation to ensure that the rates charged by common carriers are just and reasonable.42 The Commission found sufficient evidence of competition in these areas to discipline pricing and therefore adopt a lighter touch regulatory framework for these carriers.43 That same history and record of competition for BDS services does not exist in the study areas served by rate-of-return carriers that Petitioners seek to have covered by price cap BDS regulation. Thus, we find that adopting a separate, albeit largely parallel, regulatory framework for rate-of-return carriers receiving fixed support will be better suited to their circumstances.

A. Transitioning to a New Framework

19. Consistent with the Commission’s proposal and the Joint Petition, we allow all rate-of-return carriers receiving fixed universal service support to voluntarily elect to move their BDS offerings out of rate-of-return regulation to the new lighter touch framework we adopt today.44 Carriers eligible to make this election include A-CAM carriers,45 rate-of-return carriers receiving fixed support by virtue of

38 The Commission has long found that incentive regulation is superior to rate-of-return regulation because incentive regulation encourages competition and innovation while reducing carriers’ administrative burdens. See, e.g., Price Cap Order, 5 FCC Rcd at 6789-91, paras. 21-37.39 See Petitioners’ Comments at ii, 2.40 Id. at 2. 41 TDS Telecom Comments at 2.42 BDS Order, 32 FCC Rcd at 3466-99, paras. 10-85.43 Id. at 3498-99, paras. 83-84. 44 Notice at 9-10, 23-24, paras. 17, 19, 60-61; Joint Petition at 2. 45 See Notice at 2, 9, paras. 1, 17; PN Authorizing 182 Rate-of-Return Carriers to Receive A-CAM Support, 32 FCC Rcd at 842, para. 1 (authorizing 182 rate-of-return carriers that elected 217 revised offers of A-CAM support to receive support, bringing the nationwide total to 207 rate-of-return carriers in 43 states that have been authorized to


9

being affiliated with price cap carriers,46 Alaska Plan carriers,47 and rate-of-return carriers that accept future offers of A-CAM support or otherwise transition away from legacy support mechanisms.48 The first three types of carriers receive fixed or model-based universal service support, rather than receiving high-cost support based on their costs, and therefore are currently required to prepare cost studies only for their BDS offerings. Relieving these carriers of rate-of-return regulation for their BDS will save them the expense of preparing burdensome cost studies only for those offerings.

20. Similarly, to the extent the Commission provides future offers of A-CAM support or otherwise transitions carriers away from legacy support mechanisms, carriers that receive such support will only have to prepare cost studies for purposes of their BDS offerings.49 Therefore, if the Commission announces future offers of A-CAM support or otherwise transitions carriers away from legacy support mechanisms, the actions we take in this Order will allow carriers eligible for or subject to such transitions to elect the same lighter touch regulatory framework we provide for other rate-of-return carriers that receive fixed support, and may provide further incentives for rate-of-return carriers to elect to receive non-legacy, fixed or model-based support.50 This will further the Commission’s longstanding objective of providing universal service support based on forward-looking efficient costs as opposed to actual costs that may be less efficient.51

21. Consistent with Commission precedent, we do not require all rate-of-return carriers receiving fixed support to migrate their BDS offerings away from rate-of-return regulation to the new framework, but instead allow each carrier to voluntarily make that determination based on its

(Continued from previous page) receive A-CAM support); A-CAM Revised Offer Public Notice, 31 FCC Rcd at 13328, para. 1; see also A-CAM Revised Offer Order, 31 FCC Rcd at 13776, para. 5.46 See Notice at 23-24, paras. 60-61. Such carriers include price cap affiliated rate-of-return carriers that receive frozen Connect America Fund (CAF) Phase I support or CAF Phase II support that is not based on current costs. See 47 CFR §§ 54.310 & 54.312; Petitioners’ Comments at 24 n.85 (“[since] a few of Consolidated’s rate-of-return study areas, declined the right of first refusal and continue to receive Frozen CAF I support” and “do not receive cost-based high-cost universal service support, they should also qualify for the price cap BDS election.”). In the USF/ICC Transformation Order, the Commission froze universal service support for price cap carriers and price cap affiliated rate-of-return carriers, which are treated as price cap carriers for the purpose of calculating their frozen support (CAF Phase I). USF/ICC Transformation Order, 26 FCC Rcd at 17712, para. 133; 47 CFR § 54.312(a). Price cap affiliated rate-of-return carriers receiving frozen CAF Phase I support may elect CAF Phase II model-based support or, in states where they declined model-based support, apply for CAF Phase II auction support. 47 CFR §§ 54.312 & 54.310; USF/ICC Transformation Order, 26 FCC Rcd at 17712, para. 133; id. at 17725, para. 156, see Connect America Fund et al., Report and Order and Further Notice of Proposed Rulemaking, 31 FCC Rcd 5949, 5953, para. 7 (2016). The CAF Phase II auction closed on August 24, 2018, and no price cap affiliated rate-of-return carriers were assigned winning bids. See Connect America Fund Phase II Auction (Auction 903) Closes Winning Bidders Announced FCC Form 683 Due October 15, 2018, AU Docket No. 17-182, WC Docket No. 10-90, DA 18-887 (rel. Aug. 28, 2018). 47 47 CFR § 54.306; Alaska Plan Order, 31 FCC Rcd at 10142, para. 6; Alaska Plan Carriers Authorization Public Notice, 31 FCC Rcd at 13350, Appx. A (authorizing 13 rate-of-return holding companies to receive Alaska Plan support); see Notice, para. 60 n.129. 48 Notice at 10, para. 19. For example, in the recent notice of proposed rulemaking, the Commission proposed to extend a new model offer to carriers willing to accept lower support amounts in exchange for increased certainty of funding. Connect America Fund et al., WC Docket No. 10-90 et al., Report and Order, Third Order on Reconsideration, and Notice of Proposed Rulemaking, FCC 18-29, at 47, para. 117 (rel. Mar. 23, 2018) (2018 Rate-of-Return Reform NPRM).49 The Commission recently proposed making a second offer of A-CAM support. See 2018 Rate-of-Return Reform NPRM at 47, para. 117. 50 See 2016 Rate-of-Return Reform Order, 30 FCC Rcd at 3090-91, para. 4; Notice at 10, para. 19. 51 See 2016 Rate-of-Return Reform Order, 30 FCC Rcd at 3096, para. 20; Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report and Order, 12 FCC Rcd 8776, 8888-89, paras. 199, 203 (1997).


10

circumstances. When the Commission adopted price cap regulation in 1990, it made price cap regulation voluntary for all but the largest incumbent LECs.52 At that time, the Commission expressed concern that assigning one productivity factor on a mandatory basis to all LECs, regardless of size, could prove unduly burdensome for smaller and mid-sized carriers that may have fewer opportunities than larger companies to achieve cost savings and efficiencies.53 Commenters echoed those concerns in this proceeding.54 By making the election voluntary, we ensure that only carriers that can achieve sufficient efficiencies are likely to elect incentive regulation; our new framework will not, therefore, impose additional burdens on smaller carriers that cannot achieve such efficiencies.

22. We also adopt the Commission’s proposal to require electing carriers to elect incentive regulation at the holding company-level for study areas in all states where that carrier receives fixed support.55 Commenters do not oppose requiring holding company-level election.56 AT&T requests that the Commission “require that any A-CAM carrier that elects incentive regulation have that election apply across all its study areas” because this prevents “internal cost shifting among study areas.”57 Holding company-level election will maximize the regulatory efficiencies achieved by incentive regulation, including maximizing cost savings from the elimination of cost studies for all electing carriers. It is also consistent with the Commission’s past practices. For example, the Commission gave rate-of-return carriers the opportunity to elect between A-CAM and legacy cost-based support at a state-wide level.58 Likewise, the Commission required Alaska Plan carriers to elect fixed, frozen support on a state-wide basis.59 Requiring rate-of-return carriers receiving fixed support to elect regulatory treatment at the holding company-level is also consistent with the underlying premise of price cap regulation, which assumed a broad representation of carrier operations to provide a basis for establishing an industry-wide productivity factor.60

23. We provide eligible carriers with two opportunities to elect to move their BDS offerings out of rate-of-return regulation—one to be effective as of July 1, 2019 and a second effective as of July 1, 2020—to encourage them to take advantage without undue delay of the benefits that will be realized by electing carriers under the new framework61 and to discourage potential gaming opportunities. We provide two opportunities to elect this new regulatory framework, in recognition of the fact that some carriers may not have sufficient time to assess their options in time for the July 1, 2019 effective date.62

52 Price Cap Order, 5 FCC Rcd at 6799, paras. 103-106. 53 Id. at 6799, para. 106.54 See WTA Comments at 5. 55 See Notice at 9, para. 17; Petitioners’ Comments at 24; see also Joint Petition at 16-17. We note that some holding companies elected A-CAM support for their rate-of-return affiliates in some states but left their rate-of-return affiliates under legacy high-cost universal service support in other states. For example, Beehive Telephone Companies elected A-CAM support for their study areas in Nevada whereas their study areas in Utah remain on legacy universal service support. Similarly, Interstate Telecommunications Cooperative, Inc. elected A-CAM support for their study areas in Minnesota whereas their study areas in South Dakota remain on legacy universal service support. Holding companies that elected to receive A-CAM support in some states and to remain on cost-based support in other states will only be eligible to elect incentive regulation in the states where they elected A-CAM support. 56 See Petitioners’ Comments at 24; WTA Comments at 5. 57 AT&T Reply at 5-7; AT&T Comments at 11. 58 See 47 CFR § 54.311(a); 2016 Rate-of-Return Reform Order, 31 FCC Rcd at 3113, para. 65. 59 See 47 CFR § 54.306(a).60 Price Cap Order, 5 FCC Rcd at 6796, paras. 74-75. 61 See Notice at 10, para. 18. 62 Letter from Michael J. Jacobs, Vice President, Regulatory Affairs, ITTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 17-144 et al., at 2 (filed Oct. 16, 2018) (“there could be insufficient time for carriers to evaluate


11

Providing a second opportunity to elect incentive regulation will facilitate carriers’ ability to assess incentive regulation for their BDS and ultimately enhance participation in the new regulatory framework, which will further reduce unnecessary regulatory burdens and positively impact competition in electing carriers’ BDS markets.

24. Some commenters recommend that we provide an “annual opportunity to elect the new regime” based on “business strategy and compliance measures.”63 Giving eligible carriers an annual opportunity to elect incentive regulation, however, would also give them an incentive to increase their operating costs and rate base under rate-of-return regulation in order to raise rates prior to electing incentive regulation, then realize additional profits by cutting costs under incentive regulation at the expense of ratepayers. By providing only two opportunities to elect to move to the new framework, we discourage such gaming opportunities.

25. We prohibit electing carriers from returning their study areas to rate-of-return regulation. One of the rationales for the Commission’s “all-or-nothing” rules for price cap carriers is to prevent carriers from potentially switching back and forth between rate-of-return and price cap regulation to take advantage of uneven cycles of investment.64 We are likewise concerned with potential gaming opportunities for electing carriers if they are allowed to switch back and forth between rate-of-return and incentive regulation.65 Electing carriers could inflate their revenues by opting-out of incentive regulation, building a larger rate base under rate-of-return regulation in order to raise rates, and then, returning to incentive regulation or opting into price cap regulation, thus reducing costs back to an efficient level. These gaming opportunities would distort carriers’ decisions to invest and frustrate the public interest because ratepayers would not see the benefit of capped and decreased rates in the manner intended under incentive regulation.66 Further, in the 1990 Price Cap Order, the Commission determined that for price cap regulation to work effectively and for incentives to develop and influence carrier behavior and earnings, an electing carrier must make a permanent commitment.67 We similarly find, that for incentive regulation to work properly, the election must be permanent. Accordingly, a carrier’s voluntary election of incentive regulation will be irrevocable.

(Continued from previous page) whether to remain in the NECA pool for their business data service offerings . . . .”) (ITTA Oct. 16 Ex Parte); but see Letter from Caroline Van Wie, AT&T, to Marlene H. Dortch, Secretary, FCC, WC Docket 17-144 et al., at 1 (filed Oct. 17, 2018) (asserting that a one-time opportunity for eligible carriers to elect incentive regulation is reasonable).63 TDS Telecom Comments at 3-4. 64 47 CFR § 61.41(d); Multi-Association Group (MAG) Plan for Regulation of Interstate Services of Non-Price Cap Incumbent Local Exchange Carriers and Interexchange Carriers; Federal-State Joint Board on Universal Service, CC Docket Nos. 00-256, 96-45, Report and Order and Second Further Notice of Proposed Rulemaking, 19 FCC Rcd 4122, 4126-7, paras. 6-7 (2004) (2004 MAG Order); see also 47 CFR § 61.41(e) (a rate-of-return carrier may return lines acquired from a price cap carrier to rate-of-return regulation, provided that the lines will not be subject to average schedule settlements and that the rate-of-return carrier may not for five years elect price cap regulation for itself or the acquired lines); 2004 MAG Order, 19 FCC Rcd at 4130, para. 13 (despite allowing rate-of-return carriers to return lines acquired from a price cap carrier to rate-of-return regulation, the Commission recognized the possibility of the rate-of-return carrier later seeking to return to price cap regulation, potentially gaming the system, concluding that once a rate-of-return carrier brings acquired price cap lines into rate-of-return regulation, it may not for five years elect price cap regulation).65 See Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87-313, Order on Reconsideration, 6 FCC Rcd 2637, 2706, para. 148 (1991) (Price Cap Reconsideration Order); see also 47 CFR § 61.41; 2004 MAG Order, 19 FCC Rcd at 4126-7, paras. 6-7. 66 See 2004 MAG Order, 19 FCC Rcd at 4126-7, paras. 6-7; see Price Cap Reconsideration Order, 6 FCC Rcd at 2706, para. 148.67 Price Cap Order, 5 FCC Rcd at 6819, para. 269; see Regulatory Reform for Local Exchange Carriers Subject to Rate of Return Regulation, CC Docket No. 92-135, Order on Reconsideration, 12 FCC Rcd 2259, 2266-67, para. 14 (1997).


12

26. AT&T requests that the “Commission decline to waive the ‘all-or-nothing’ rule for these carriers and require that any A-CAM carrier that elects incentive regulation have that election apply across all its study areas and, even more critically, across all of its interstate services within a study area.”68 The all-or-nothing rule AT&T cites, however, applies to price cap carriers, not to rate-of-return carriers that elect incentive regulation.69 While the incentive regulation rules we adopt for electing carriers impose price caps on some of the BDS services offered by electing carriers, electing carriers do not become price cap carriers by virtue of their election; therefore the all-or-nothing rule is simply not applicable here.

27. We allow electing carriers’ switched access services to remain subject to the multi-year transition provided for rate-of-return carriers in the USF/ICC Transformation Order.70 We therefore decline to adopt AT&T’s recommendation that electing carriers be required to convert all their services to price cap regulation, including their switched access services,71 which—compared to price-cap carriers’ switched access services—benefit from a longer transition to bill-and-keep and no phase-out of Connect America Fund Intercarrier Compensation replacement support.72

28. According to AT&T “[w]hile different transitions for price cap carriers and rate-of-return carriers may have made sense in 2011, those distinctions should not unfairly benefit carriers” electing incentive regulation and could lead to cost-shifting between types of services.73 We disagree with AT&T’s assertion that electing carriers will “unfairly benefit” from our decision not to convert all of their offerings to incentive regulation. The Commission adopted different intercarrier compensation transitions in the context of a complex rulemaking that were the result of a careful analysis of a variety of factors and policy considerations, including the differential impact of universal service and intercarrier compensation reform on price cap as compared to rate-of-return carriers.74 As TDS Telecom explains, in the intervening seven years, carriers have relied on those transitions to plan their businesses and make investments.75 Changing those transitions at this point would disrupt these settled expectations and potentially undermine, rather than encourage, investment and innovation in electing carriers’ BDS markets.76 We also find AT&T’s concerns about cost-shifting unfounded because switched access rates were capped and therefore removed from cost-based regulation in 2011 by the USF/ICC Transformation Order, eliminating the incentive for inappropriate cost shifting.77

29. Following the same logic, we decline to adopt AT&T’s proposal that we require electing

68 AT&T Comments at 11. 69 See 47 CFR § 61.41. 70 USF/ICC Transformation Order, 26 FCC Rcd at 17934-35, para. 801.71 AT&T Comments at 10. 72 See USF/ICC Transformation Order, 26 FCC Rcd at 17994-96, paras. 917-920. In the USF/ICC Transformation Order, as part of reforming the intercarrier compensation system, the Commission adopted a recovery mechanism called Connect America Fund Intercarrier Compensation replacement support which allows incumbent LECs to recover from the universal service fund a portion of intercarrier compensation switched access revenues. Id. 73 Id. at 10. 74 USF/ICC Transformation Order, 26 FCC Rcd at 17994-96, paras. 917-920; see also Petitioners’ Reply at 8; WTA Comments at 4.75 See TDS Telecom Comments at 7 (A-CAM carriers “have made critical investment strategies based on the existing schedule for phasing down terminating switched access charges”). 76 See Petitioners’ Comments at 22 (“Upsetting these carefully crafted regulations for model-based rate-of-return carriers would undoubtedly raise complex questions that would take time to evaluate and resolve and entail a real risk of unintended harm to rural rate-of-return carrier businesses, networks, and customers.”). 77 USF/ICC Transformation Order, 26 FCC Rcd at 17934-36, para. 801, Fig. 9; see NTCA Reply at 4 (“these rate elements are reformed and capped . . . there is no material risk of ‘gaming’”).


13

carriers to exit the National Exchange Carrier Association (NECA) tariff pool for their “switched and special access services to avoid additional complexities in the annual tariff review process and to avoid potential gaming.”78 As Petitioners argue, AT&T “fails to explain how any cost shifting would be useful given the switched access rules [that cap rates].”79 Moreover, the scrutiny inherent in the Part 61 tariff review process helps reduce the risk of cost-shifting or other gaming by pool participants.80 We do, however, require electing carriers currently participating in the NECA traffic-sensitive tariff pool for their BDS or special access service offerings to remove their BDS and special access offerings from the pool since those services will be subject to incentive regulation.81

30. We find that the lighter touch regulatory framework we adopt provides electing carriers the right balance of relief from the burdensome aspects of rate-of-return regulation and pricing discipline. The efficiencies gained from reducing regulatory burdens on electing carriers, including the increased flexibility to compete in the market, will foster network investment and impose downward pressure on prices. We also find here, as we did in the BDS Order, that “minimiz[ing] unnecessary government intervention . . . allows market forces to continue working to spur entry, innovation, and competition.”82

B. Applying Voluntary Incentive Regulation to Electing Carriers’ Lower Speed TDM Transport and End User Channel Termination Services

31. In this section, we provide direction on implementing the voluntary incentive regulation we adopt today for electing carriers’ lower capacity (i.e., at or below a DS3-level) TDM transport and end user channel termination services as part of our comprehensive lighter touch regulatory framework for electing carriers’ BDS. We treat electing carriers’ lower capacity TDM transport and end user channel terminations differently from packet-based and higher speed TDM-based BDS offerings because the record shows that packet-based offerings are subject to competition that will ensure just and reasonable rates for those services.83 By contrast, the record shows that demand for lower speed TDM-based transport and end user channel terminations services is shrinking as purchasers increasingly prefer higher speed and packet-based services.84 Recognizing that the market is transitioning to new technologies, we provide protections for lower speed TDM-based transport and end user channel termination services. Based on the current record, we preserve ex ante pricing regulation for lower speed TDM-based transport services and adopt a competitive market test that will preserve ex ante pricing regulation in those study areas where we predict there is a substantial likelihood that competition will fail to ensure just and reasonable rates for the lower capacity TDM-based end user channel termination services. While the record is currently not sufficient to justify removal of ex ante pricing regulation from lower speed TDM-based transport services, in the accompanying Further Notice we provide a further opportunity for stakeholders to comment on the appropriate treatment of lower speed TDM-based transport services.

32. Rate-of-return carriers that make this election will convert to incentive regulation for their lower capacity TDM transport and end user channel termination services as well as other generally

78 AT&T Comments at 11 n.33; see AT&T Reply at 5 n.18. 79 Petitioners’ Reply at 8-9 n.34 (“[W]hether or not [A-CAM companies] participate in the NECA Switched Access pooling process . . . [t]here is . . . simply no benefit to be gained in shifting interstate costs.”). 80 See 47 CFR Part 61.81 See AT&T Comments at 5. 82 BDS Order, 32 FCC Rcd at 3462, para. 5. 83 Id. at 3482-83, paras. 46-47; Petitioners’ Comments at 14 (“Ethernet services are rapidly becoming the end user customer’s service of choice.”); TDS Telecom Comments at 8 (claiming that carriers’ “TDM services have been on the decline, while they have seen increases in their Ethernet connections”); AT&T Comments at 15-16.84 Petitioners’ Comments at iv, 14 (arguing that customers in areas served by rate-of-return carriers increasingly demand IP-based services such as Ethernet, and model-based carriers have experienced the rapid decline in demand for DS1 and DS3 services as have price cap carriers).


14

lower capacity non-packet-based services that are commonly considered special access services.85 Specifically, among other matters, we adopt a methodology for electing carriers to set their initial rates, allow an unfreeze of separations category relationships for carriers that elected to freeze them in 2001, adopt a productivity factor and measure of inflation to adjust rates, and grant pricing flexibility to electing carriers for their lower capacity TDM services.

1. Initial Rate Levels

33. First, we adopt the methodology electing carriers must use to establish rates for their lower capacity TDM transport and end user channel termination services pursuant to incentive regulation.86 For rate-of-return carriers that file their own tariffed rates, we adopt the approach proposed in the Notice to set initial BDS rate levels based on rates in effect on January 1, 2019 for carriers converting to incentive regulation as of July 1, 2019 and on rates in effect on January 1, 2020 for carriers that elect incentive regulation effective as of July 1, 2020.87 For rate-of-return carriers participating in the NECA traffic-sensitive tariff pool that elect incentive regulation effective July 1, 2019, we adopt the approach proposed in the Notice for members exiting the pool to set their initial BDS rate levels by adjusting NECA pool rates in effect on January 1, 2019 by a net contribution or net recipient factor.88 Carriers electing incentive regulation as of July 1, 2020 must set their initial BDS rate levels by adjusting NECA pool rates in effect on January 1, 2020. Electing carriers will then adjust their rates using a methodology that is consistent with the price cap formulas in sections 61.45 to 61.47 of our rules, by applying the productivity factor (X-factor), inflation factor (Gross Domestic Product-Price Index (GDP-PI)), and any required exogenous cost changes. Carriers may adjust these rates to reflect the pricing flexibility permitted by the pricing bands in the Special Access category.

34. Under rate-of-return regulation, incumbent LECs are permitted to recover through tariffed rates their revenue requirement, which is equal to their regulated operating costs plus a prescribed rate of return on their regulated rate base.89 Rate-of-return carriers set rates at levels that when multiplied by demand will yield revenues equal to their revenue requirement, and are targeted to earn the Commission’s prescribed rate of return.90 Rate-of-return carriers establish rates for BDS offerings either by filing their own interstate access tariffs and cost support pursuant to sections 61.38 or 61.39 of our rules or, for most rate-of-return carriers, by participating in the NECA traffic-sensitive tariff and traffic-sensitive pool.91 NECA sets the BDS rates in the traffic-sensitive tariff based on projected aggregate

85 In the BDS Order, the Commission included these other, generally lower capacity (i.e. below a DS3-level), special access services in the regulatory relief it provided for price cap carriers’ DS1 and DS3 end user channel termination services. See BDS Order, 32 FCC Rcd at 3499, para. 86 & n.281 (citing 47 CFR § 61.42(e)(3)). These other services are generally provided at speeds at or below a DS3 and were part of the price cap special access basket. They included services such as metallic services, voice grade services, audio services, and video services which are typically referenced in the special access services section of A-CAM carriers’ interstate tariffs. See, e.g., National Exchange Carrier Association, Inc. Tariff F.C.C. No. 5 § 7.86 See Notice at 10-11, paras. 20-22. 87 Id. at 10, para. 20. 88 Id. at 10-11, para. 21. 89 See Windstream Price Cap Conversion Order, 23 FCC Rcd at 5295, para. 3; Represcribing the Authorized Rate of Return for Interstate Services of Local Exchange Carriers, CC Docket No. 89-624, Order, 5 FCC Rcd 7507, 7507, para. 1 (1990). 90 See Establishing Just and Reasonable Rates for Local Exchange Carriers, WC Docket No. 07-135, Notice of Proposed Rulemaking, 22 FCC Rcd 17989, 17990-94, paras. 2-10 (2007) (Access Charge Tariff NPRM); 2016 Rate-of-Return Reform Order, 30 FCC Rcd at 3172, para. 229.91 47 CFR §§ 61.38-61.39; Access Charge Tariff NPRM, 22 FCC Rcd at 17992-93, paras. 6-8; National Exchange Carrier Association, Inc., Tariff F.C.C. No. 5. Although electing carriers must remove their BDS from the NECA pool, they may include their non-pool rates in the NECA tariff filing.


15

costs (or average schedule settlements) and demand of all pool members, which are targeted to earn the authorized rate of return for NECA pool members.92

35. When the Commission launched price cap regulation in 1990, it found that interstate access rates as they existed on July 1, 1990, six months prior to the date price caps went into effect on January 1, 1991, were the most reasonable basis from which to set initial rate levels under price cap regulation.93 In other words, those rates created the starting point for the indexing of rates under price cap regulation—setting their price cap index, actual price index and service band index at a value of 100. The price cap index is adjusted by the productivity offset (X-factor) and inflation (GDP-PI) for the first year, and each year thereafter.94 The Commission reasoned that interstate rates that existed on July 1, 1990 “while perhaps not perfect, in general represent the best that rate of return regulation can produce.”95

36. Beginning with the Windstream Order, the Commission granted several waivers allowing price cap carriers to convert their rate-of-return study areas to price cap regulation.96 Carriers were, among other things, required to establish initial price cap indexes using the rates in effect on January 1 of the conversion year, six months prior to the July 1 effective date of conversion, the demand from the preceding year, and required to target their rates using the X-factor in effect at that time.97 In the 2012 Average Schedule Conversion Order, the Commission permitted several rate-of-return carriers to, among other things, withdraw their average schedule study areas from the NECA pool and convert them to price cap regulation.98 In that order, the Commission approved a methodology for establishing initial price cap

92 Access Charge Tariff NPRM, 22 FCC Rcd at 17992-93, paras. 6-8. In lieu of cost studies, average schedule carriers are compensated by formulas that establish settlements for average schedule carriers that are comparable to the settlements received by comparable cost companies. The average schedule settlements are added to the costs of the cost companies to form the revenue requirement for the pool. Id. at 17992, para. 6 n.23.93 Price Cap Order, 5 FCC Rcd at 6814, para. 230; see CenturyLink Average Schedule Conversion Order, 29 FCC Rcd at 5144, para. 10. 94 Price Cap Order, 5 FCC Rcd at 6814, para. 231; BDS Order, 32 FCC Rcd at 3544, para. 198. We use the term “price cap indexes” to capture the three price cap indexes used in price cap regulation: price cap index, actual price index and service band index. See 47 CFR §§ 61.45-61.47. 95 Price Cap Order, 5 FCC Rcd at 6814, para. 232.96 See Windstream Price Cap Order, 23 FCC Rcd at 5302, para. 18; see also Joint Petition of Price Cap Holding Companies for Conversion of Average Schedule Affiliates to Price Cap Regulation and for Limited Waiver Relief, WC Docket No. 12-63; Consolidated Communications Companies Tariff F.C.C. No. 2, Transmittal No. 41; Frontier Telephone Companies Tariff F.C.C. No. 10, Transmittal No. 28; Windstream Telephone System Tariff F.C.C. No. 7, Transmittal No. 57, Order, 27 FCC Rcd 15753 (2012) (2012 Average Schedule Conversion Order); CenturyLink Petition for Conversion of Average Schedule Affiliates to Price Cap Regulation and for Limited Waiver Relief, WC Docket No. 14-23, Order, 29 FCC Rcd 5140, 5141-42, para. 2 (WCB 2014) (CenturyLink Average Schedule Conversion Order); Petition of Virgin Islands Telephone Corporation for Election of Price Cap Regulation and for Limited Waiver of Pricing and Universal Service Rules, WC Docket No. 10-39; China Telephone Company, FairPoint Vermont, Inc., Maine Telephone Company, Northland Telephone Company of Maine, Inc., Sidney Telephone Company, and Standish Telephone Company Petition for Conversion to Price Cap Regulation and for Limited Waiver Relief, WC Docket No. 10-47; Petition of Windstream for Limited Waiver Relief, WC Docket No. 10-55, Order, 25 FCC Rcd 4824 (WCB 2010); ACS Price Cap Conversion Order, 24 FCC Rcd 4664; Combined Price Cap Conversion Order, 23 FCC Rcd 7353 (WCB 2010); CenturyTel Price Cap Conversion Order, 24 FCC Rcd 4677 (WCB 2009).97 See, e.g., Windstream Price Cap Conversion Order, 23 FCC Rcd at 5299-5301, paras. 11-14; CenturyLink Average Schedule Conversion Order, 29 FCC Rcd at 5141-42, para. 2; SureWest Telephone Petition for Conversion from Rate-of-Return to Price Cap Regulation and for Limited Waiver Relief, WC Docket No. 13-71, 28 FCC Rcd 8016, 8023, para. 20 (WCB 2013) (SureWest Price Cap Conversion Order).98 2012 Average Schedule Conversion Order, 27 FCC Rcd at 15753, para. 1. A cost company is a rate-of-return carrier that determines its rates based on its own costs, as opposed to determining its costs based on average schedule formulas. See, e.g., id. at 5142, para. 2 n.4; Windstream Price Cap Conversion Order, 23 FCC Rcd at 5298, para. 5 n.16. By contrast, an average schedule company is a rate-of-return company that determines its costs


16

rates using existing NECA pool tariffed rates adjusted to reflect the extent to which the exiting study areas were either a net contributor to, or a net recipient from, the NECA pool.99

37. Carriers Currently Filing Their Own Tariffs. Consistent with past practice, we adopt the proposal in the Notice for carriers that currently file their own tariffs to use existing tariffed rates to set their initial BDS rates under incentive regulation.100 Carriers first will set their price cap indexes based on their tariffed interstate special access rates in effect on January 1, 2019, or based on those rates in effect on January 1, 2020 for carriers electing to convert to incentive regulation effective July 1, 2020.101 The price cap indexes (i.e., the price cap index, actual price index, and service band index) will be assigned values of 100 as starting points, which correspond to rate levels in effect on January 1, 2019 or on January 1, 2020, as applicable. Carriers then will adjust the price cap index and the pricing band limits for each service category or subcategory consistent with sections 61.45 through 61.47 of our rules, by applying the X-factor (2.0%), inflation factor (GDP-PI), and any required exogenous cost changes. Carriers, next, will set rates so that the actual price index, calculated pursuant to section 61.46, does not exceed the price cap index, and the service band indexes for each service category or subcategory, calculated pursuant to section 61.47, do not exceed the pricing band limits for each category or subcategory, for the first year of incentive regulation and each year thereafter.102

38. Carriers Participating in NECA Pool. We also adopt the approach proposed in the Notice for electing carrier study areas exiting the NECA traffic-sensitive tariff pool to establish their initial BDS rates under incentive regulation by multiplying the NECA pool rate in effect on January 1, 2019 by a net contribution or net recipient factor or by doing so using the NECA pool rate in effect on January 1, 2020 for carriers electing conversion in 2020.103 No commenters opposed this proposal.104 Electing carriers exiting the NECA pool will adjust the NECA pool rate to reflect the extent they are either a net contributor or net recipient in order to ensure their rates are just and reasonable. Each NECA pool member receives a settlement from the pool based on its costs plus a pro rata share of the earnings,

(Continued from previous page) based on formulas approved by the Commission that are designed to produce disbursements that would be received based on the costs of a company that is representative of average schedule companies. See 47 CFR § 69.606; CenturyLink Average Schedule Conversion Order, 29 FCC Rcd at 5142, para. 2 n.4; Windstream Price Cap Conversion Order, 23 FCC Rcd at 5295, para. 3 n.4; Access Charge Tariff NPRM, 22 FCC Rcd at 17990-94, paras. 2-10.99 2012 Average Schedule Conversion Order, 27 FCC Rcd at 15758-64, paras. 11-31; see CenturyLink Average Schedule Conversion Order, 29 FCC Rcd at 5145, para 13. Under that approach, carriers exiting the NECA pool use the revenue requirement calculated using pool settlement data for the most recent tariff year and the authorized rate of return, and revenues derived from the NECA rates during the same tariff year, to calculate a net contribution or net recipient factor, to develop initial price cap rate levels. 2012 Average Schedule Conversion Order, 27 FCC Rcd at 15761-62, para. 19.100 Notice at 10, para. 20. 101 If electing carriers are allowed to unfreeze their category relationships for separations purposes, or we forbear from applying the separations procedures to electing A-CAM carriers, some further rate adjustments may be necessary. See infra section II.B.2; Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Further Notice of Proposed Rulemaking, FCC 18-99, para. 2 (rel. Jul. 18, 2018) (Separations Freeze Extension FNPRM) (proposing to extend the jurisdictional separations freeze, set to expire on December 31, 2018, for 15 years, and proposing allowing rate-of-return carriers that elected to freeze their separations category relationships in 2001 to opt out of that freeze). 102 47 CFR §§ 61.45-61.47; Notice at 10-11, para. 21.103 Notice at 10-11, para. 21.104 See Petitioners’ Comments at 9; see Letter from Mike Jacobs, Vice President, ITTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 17-144 (dated Aug. 27, 2018) (ITTA Aug. 27, 2018 Ex Parte).


17

or based on its settlement pursuant to the average schedule formulas.105 NECA pool rates are lower than necessary for a net recipient to recover its revenue requirement, or higher than necessary for a net contributor to recover its revenue requirement, and must be adjusted by the extent to which the existing study area is a net contributor to, or net recipient from, the NECA pool in order to satisfy the just and reasonable standard.106 Without an adjustment, electing carriers’ BDS rates would be either artificially high or low going forward.107

39. First, to determine the appropriate net contributor or net recipient factor, electing carriers exiting the pool effective July 1, 2019 will determine their interstate special access revenue for the period July 1 to December 31, 2018. An electing carrier exiting the NECA tariff shall determine its pool settlements to be used in developing the factor based on costs for the period July 1 through December 31, 2018, which reflects the first six months of tariff year 2018-19, the 12-month period for which the costs underlying the January 1, 2019 rates were projected.108 The pool settlements shall be adjusted to reflect the 10.5% rate of return which was used to establish the revenue requirement for the January 1, 2019 rates. Second, carriers will calculate the difference between the exiting pool member’s interstate special access revenues for July 1 to December 31, 2018 and special access pool settlements reflecting the authorized rate of return for this same period.109 Third, this net contribution or net recipient amount will then be divided by interstate special access revenues for the same period to produce a percent net contribution or net recipient factor. Fourth, carriers shall proportionately adjust their special access NECA pool rates in effect on January 1, 2019 downward by the net contribution factor or upward by the net recipient factor.110 Finally, carriers will adjust these rates further consistent with sections 61.45 through 61.47 of our rules, in the manner described above for carriers that file their own tariffs, to set their initial BDS rates for the first year of incentive regulation.111 Carriers electing to exit the NECA pool effective July 1, 2020 will use the same methodology to adjust their rates but using the corresponding dates that are one year later.

40. We agree with Petitioners that recommend that initial rates be based on the existing tariffed rates at the time of a carrier’s election of incentive regulation.112 AT&T and Sprint disagree and argue that the Commission should adjust initial BDS rates to account for the rate of return transition that is currently underway.113 The Commission adopted a six-year transition in 2016 to reduce the then-

105 See Notice at 10-11, para. 21. In lieu of cost studies, average schedule carriers are compensated by formulas that establish settlements for average schedule carriers that are comparable to the settlements received by comparable cost companies. The average schedule settlements are added to the costs of the cost companies to form the revenue requirement for the pool. 106 See 47 U.S.C. § 205(a). 107 See 2012 Average Schedule Conversion Order, 27 FCC Rcd at 15760-61, para. 17; Connect America Fund et al., WC Docket No. 10-90 et al., Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking, 26 FCC Rcd 4554, 4760, paras. 644-45 (2011); Regulation of Small Telephone Companies, CC Docket No. 86-467, Report and Order, 2 FCC Rcd 3811, 3811-12, paras. 5-7 (1987); CenturyLink Average Schedule Conversion Order, 29 FCC Rcd at 5145, para. 13; See Connect America Fund et al., WC Docket No. 10-90, Order, 28 FCC Rcd 3319, 3325, para. 12 n.47 (WCB 2013); id. at 3326, para. 14. 108 See ITTA Aug. 27, 2018 Ex Parte at 1.109 The settlements for these six months shall be based on a cost study for calendar year 2018 that has been incorporated into the NECA settlements process that spreads the costs throughout the year. 110 See Notice at 10-11, para. 21 & n.50.111 See 47 CFR §§ 61.45-47.112 Petitioners’ Comments at 9-10. 113 See Sprint Comments at 2-4; AT&T Comments at 11-13.


18

11.25% rate of return by 25 basis points per year until the rate of return reaches 9.75% in 2021.114 AT&T and Sprint argue that the Commission should adjust electing carriers’ initial BDS rates to reflect the fully-transitioned 9.75% rate of return115 or, at a minimum, Sprint argues that the Commission should adjust the price capped rates each year during the rate-of-return transition until it ends in 2021.116 AT&T claims that “[s]etting electing A-CAM carriers’ initial rate-of-return at the 9.75% level immediately upon converting to price cap, while not completely correcting, would help alleviate any rate disparities and aligns with the Commission’s finding that a 9.75% rate of return is more than reasonable.”117

41. We find that existing tariffed rates targeting the transitional 10.5% rate of return in effect is the more appropriate rate from which to launch incentive regulation for carriers electing to convert to incentive regulation effective July 1, 2019.118 AT&T and Sprint fail to accord any significance to the Commission’s decision to implement changes in the prescribed rate of return over six years and the reasons for such a measured and lengthy transition. In granting a six-year transition, the Commission acknowledged that “for almost 25 years, rate-of-return carriers have made significant infrastructure investments . . . and that represcribing the rate of return will have a financial impact on these carriers.”119 Rate-of-return carriers’ business plans and long-term capital investments are typically based on an expected multi-year revenue stream. The Commission determined that an immediate transition to a 9.75% rate of return would disrupt these carriers’ reasonable reliance on these expected revenues. The Commission also recognized that “rate-of-return incumbent LECs have been subject to significant regulatory changes in recent years, and that such changes are occurring at a time when these carriers are attempting to transition their networks and service offerings to a broadband world.”120 Reflecting the balance of the six-year transition whether through a one-time adjustment, or through a series of three adjustments, would abandon this careful transition and would likely disrupt electing carriers’ ability to invest in upgrading and transitioning their networks to provide broadband in the rural communities they serve.121

42. We also find that once a carrier elects incentive regulation, its rates should be based on that form of regulation and not effectively a hybrid or combination of rate-of-return and incentive

114 2016 Rate-of-Return Reform Order, 31 FCC Rcd at 3211-12, para. 326.115 See Sprint Comments at 2 (“Service rates subject to incentive regulation should reflect the full transition to the last authorized [rate of return] of 9.75% . . . .”); AT&T Comments at 11 (“AT&T requests that, should the Commission grant its per se waiver of the all-or-nothing rule, it require that any electing carrier’s initial price cap BDS rates reflect the appropriate [rate of return] that that carrier would have transitioned to under the Commission’s rate-of-return framework.”); id. at 12-13 (“Therefore, at a minimum, any electing A-CAM carrier’s initial [rate of return] should be adjusted downward by 75 basis points to reflect the [rate of return] that would have been reached at the end of the transition.”); see also id. at 13 n.42 (arguing that a 75 basis point downward adjustment of the rate of return “could be taken as an exogenous cost adjustment”).116 See Sprint Comments at 2 (“Service rates subject to incentive regulation should reflect the full transition to the last authorized [rate of return] of 9.75%, or, at a minimum, the initial rates should be adjusted each year to reflect the transition to the 9.75% that ends in 2021.”); id. at 4-5 (Sprint argues that the “first option would be administratively easier” but if the second option is adopted, it “would be reasonable to utilize the same investment base from the year rates are initiated . . . in all years thereafter so the [incumbent LECs] do not have to recalculate the investment base each year.”). 117 AT&T Comments at 13. 118 Carriers electing to convert to incentive regulation as of July 1, 2020 will use tariffed rates applicable to them as of January 1, 2020, i.e., rates based on the 10.25% rate of return applicable at that time. 119 2016 Rate of Return Reform Order, 31 FCC Rcd at 3211, para. 325. 120 Id. 121 AT&T further suggests that adjusting the rate of return could be taken as an exogenous cost adjustment. AT&T Comments at 13 n.42. Simply changing the mode of implementing such an adjustment, however, fails to address the underlying policy concerns raised by abandoning the remainder of the six-year transition.


19

regulation, which would be the result were we to adopt the annual adjustment the Commission has applied to carriers that are subject to cost-based rate-of-return regulation as proposed by Sprint.122 Capping BDS rates of an electing carrier that will be subject to incentive regulation and reducing them annually by the X-factor going forward will be sufficient to ensure these rates are just and reasonable while at the same time creating the right incentives to operate efficiently—a goal we cannot expect to achieve by continuing to overlay rate-of-return obligations on top of an incentive regulation scheme. An annual 25 basis point adjustment would also be more administratively burdensome to implement.123 Rather than perpetuating policies associated with an inefficient rate-of-return system, we look to the ongoing operation of incentive regulation to spur carriers to be more efficient and productive than they were under rate-of-return regulation using X-factor-based rate reductions.

43. Finally, as some commenters explain, reducing initial BDS rate levels to account for the rate of return transition would “reduce the motivation of a carrier to opt into incentive regulation” contrary to the goals of this Order and the Commission’s preference for incentive-based regulation.124 If initial BDS rates were adjusted to the fully-transitioned rate of return of 9.75%, carriers would be able to earn a higher return and revenue during the rate-of-return regulation transition that ends in 2021 than by moving to incentive regulation. This outcome is contrary to the Commission’s long-standing policy preferring incentive-based regulation over rate-of-return regulation and encouraging conversions to incentive-based regulation.125 Incentive regulation will encourage electing carriers to be more efficient than they were under rate-of-return regulation, and pass some of these efficiencies on to consumers through rate reductions (or rates that are lower than otherwise) through the application of a price cap formula that reflects a properly calculated X-factor.126 Accordingly, we seek to encourage carriers to adopt incentive regulation by allowing electing carriers to set their initial rates under incentive regulation based on rates reflecting the transitional rate of return currently in effect.

44. We agree with Petitioners that initial rates for lower capacity TDM transport and end user channel termination services should be based on existing tariffed deemed lawful rates—rates that target the effective transitional rate of return.127 We therefore set initial rates for carriers electing to convert to incentive regulation as of July 1, 2019 for lower capacity TDM transport and end user channel termination services based on electing carriers’ tariffed rates in effect on January 1, 2019, six months prior to when incentive regulation goes into effect on July 1, 2019.128 Similarly, initial rates for carriers electing to convert to incentive regulation as of July 1, 2020 will be based on the tariffed rates in effect on January 1, 2020. Existing tariffed rates filed pursuant to section 204(a)(3) of the Act that take effect, without prior suspension and investigation, are deemed lawful and conclusively presumed to be just and

122 See Sprint Comments at 4-5.123 See id. (acknowledging that setting initial rates to “reflect the full transition” would be “administratively easier to implement” compared to an annual adjustment). 124 See Petitioners’ Reply at 9-10. 125 See Price Cap Order, 5 FCC Rcd at 6790, para. 31; CenturyLink Average Schedule Conversion Order, 29 FCC Rcd. at 5114, para. 10; USF/ICC Transformation Order, 26 FCC Rcd at 17940, para. 814. 126 See Price Cap Order, 5 FCC Rcd at 6815, para. 242.127 Petitioners’ Comments at 9-10. 128 Setting initial rates based on tariffed rates in effect six months prior to when incentive regulation goes into effect is consistent with how the Commission launched price cap regulation and price cap conversions. See Price Cap Order, 5 FCC Rcd at 6814, para. 230; Windstream Price Cap Conversion Order, 23 FCC Rcd at 5299-301, paras. 11-14; CenturyLink Average Schedule Conversion Order, 29 FCC Rcd at 5140-41, 5144, paras. 2, 10; SureWest Price Cap Conversion Order, 28 FCC Rcd at 8023, para. 20.


20

reasonable.129 Setting initial rates based on existing tariffed rates, as noted by commenters, is “consistent with the methodologies used in the past when rate-of-return carriers have converted to price cap regulation.”130 Further, the selection of tariffed rates in effect on a date that precedes the effective date of incentive regulation helps prevent rapid aggregate price increases in the period leading up to the incentive regulation that would inflate price cap baseline rates.131 Accordingly, price cap indexes under incentive regulation will be initially set at a value of 100 based on rates in effect on January 1, 2019 for carriers electing incentive regulation as of July 1, 2019, and on rates in effect on January 1, 2020 for carriers electing incentive regulation as of July 1, 2020.132 Business data services rates for carriers accepting future offers of A-CAM support or otherwise transition away from legacy support mechanisms will be effective on July 1 in the year following their election.

2. Category Relationships Unfreeze

45. We give electing carriers subject to the category relationships freeze of our separations rules, including any such carriers that accept future offers of A-CAM support or otherwise transition away from legacy support mechanisms, the opportunity to opt out of that freeze.133 We agree with Petitioners and WTA that the category relationships freeze creates a cost recovery hardship for certain carriers and a distortion in rates that should not be incorporated into rates that electing carriers set for lower capacity circuit-based business data services under incentive regulation.134

46. Background. Rate-of-return incumbent LECs use their networks and other resources to provide both interstate and intrastate services. The Commission’s Part 36 jurisdictional separations rules are designed to help prevent the recovery of the same costs from both the interstate and intrastate jurisdictions and require that rate-of-return incumbent LECs divide their costs and revenues between the respective jurisdictions.135 The jurisdictional separations analysis begins with categorizing the incumbent LEC’s regulated costs and revenues, a process requiring that the incumbent LEC assign the regulated investments, expenses, and revenues recorded in its Part 32 accounts to various Part 36 categories.136 The incumbent LEC then directly assigns to the interstate or intrastate jurisdiction, or allocates between those jurisdictions, the costs or revenues in each Part 36 category.

47. In 1997, the Commission initiated a proceeding to comprehensively reform its jurisdictional separations rules and referred that matter to the Federal-State Joint Board on Jurisdictional Separations (Joint Board) for preparation of a recommended decision.137 In the 2001 Separations Freeze Order, the Commission froze the jurisdictional separations rules to allow time for the Joint Board to

129 47 U.S.C. § 204(a)(3); see Implementation of Section 402(b)(1)(A) of the Telecommunications Act of 1996, CC Docket No. 97-23, Report and Order, 12 FCC Rcd 2170, 2182, 2202-03, paras. 18, 67-68 (1997) (Streamlined Tariff Order).130 See Petitioners’ Comments at 9-10; Petitioners’ Reply at 9-10; Windstream Price Cap Conversion Order, 23 FCC Rcd at 5299-5301, paras. 11-14 (requiring carriers to establish initial price cap indexes for their price cap baskets using the rates in effect on January 1 of the conversion year, six months prior to when those initial price cap rates went into effect, July 1, and the demand from the preceding year); CenturyTel Price Cap Conversion Order, 24 FCC Rcd at 4677, para. 14; Price Cap Order, 5 FCC Rcd at 6786, paras. 230-31; see also id. at 6816, para. 245. 131 See Price Cap Order, 5 FCC Rcd at 6814, 6187, paras. 231, 245.132 See id. at 6814, paras. 230-31.133 Notice at 24, para. 62.134 Petitioners’ Comments at 12; WTA Comments at 5; Joint Petition at 15-16.135 See 47 CFR Part 36.136 In some instances, the incumbent LEC further disaggregates costs and revenues among subcategories. For convenience, “categories” here refers to both categories and subcategories. 137 Jurisdictional Separations Reform and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Notice of Proposed Rulemaking, 12 FCC Rcd 22120, 22122-24, paras. 2-5 (1997) (1997 Separations Reform NPRM).


21

develop recommendations on comprehensive separations reform.138 Also in that Order, the Commission granted rate-of-return carriers a one-time option to freeze their category relationships, enabling each carrier to determine whether such a freeze would be beneficial “based on its own circumstances and investment plans.”139 Carriers that elected this freeze assign regulated costs to separations categories based on separations category relationships from 2001, rather than on current data.140 Presently, approximately 28 rate-of-return carriers that receive fixed high-cost universal service support operate under this category relationships freeze.141

48. The Commission has repeatedly extended the separations freeze.142 The most recent extension is set to expire on December 31, 2018.143 In the 2018 Separations Freeze Extension proceeding, the Commission proposed to extend the separations freeze for 15 years, while providing a one-time opportunity for carriers that had elected to freeze their category relationships to opt out of that freeze and categorize their costs based on current data rather than separations category results from 2001.144 The Commission has not yet acted on that proposal.

49. Category Relationships Unfreeze. The category relationships freeze has now been in place for more than 17 years, and our rules prohibit carriers that elected that freeze from withdrawing from it.145 Rate-of-return carriers that chose to freeze their category relationships in 2001 assign costs within Part 32 accounts to categories using their separations category relationships from 2000. This means that these companies are still separating their costs based on the technologies and services that were in place in 2000, instead of being able to adjust the amounts assigned to separations categories to reflect the current network costs and services that would allow these carriers to properly recover their costs. Investment by carriers is becoming more weighted toward BDS and away from switched access and common line categories.146 Thus, we agree with Petitioners that the result is that some, if not all, carriers with frozen category relationships are unable to recover their BDS costs from BDS customers or from NECA traffic sensitive pool settlements.147

50. We therefore allow electing carriers to unfreeze and update their category relationships in conjunction with setting their initial rates, which will enable such carriers to more closely align their BDS rates with their underlying costs as they set initial incentive regulation rates.148 Once an electing carrier

138 Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Report and Order, 16 FCC Rcd 11382 (2001) (2001 Separations Freeze Order). 139 2001 Separations Freeze Order, 16 FCC Rcd at 11394, para. 21.140 Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Further Notice of Proposed Rulemaking, FCC 18-99, at 4, para. 9 (2018) (2018 Separations Freeze FNPRM).141 USTelecom Comments at 4, CC Docket No. 80-286 (filed Aug. 27, 2018). The number is approximate because the Commission has not required rate-of-return carriers to report their category relationships freeze elections.142 See 2018 Separations Freeze FNPRM at 5-6, para. 13.143 Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Report and Order, 32 FCC Rcd 4219, 4222-23, para. 9 (2017) (2017 Separations Freeze Extension Order).144 See 2018 Separations Freeze Extension FNPRM at 1-2, 9, paras. 2, 23.145 See 47 CFR § 36.3.146 See 2018 Separations Freeze FNPRM at 10, para. 25 (citations omitted). 147 See Joint Petition at 16 (arguing the unfreeze “would contribute to establishing valid and reasonably compensatory rates from the beginning of price cap regulation” and that without this modification, carriers will not “have the opportunity to align their BDS rates with their costs”). 148 This assumes that the Commission decides to extend the current separations freeze past December 2018 in the 2018 Separations Freeze Extension FNPRM proceeding. If it does not, then presumably carriers electing future


22

implements incentive regulation rates for its BDS, it will no longer need to comply with the separations rules by virtue of our action below forbearing from application of the separations and other cost assignment rules to electing carriers. This, in turn, will allow the carriers and their customers to benefit from the efficiencies of incentive regulation.

51. The Commission originally allowed rate-of-return carriers the flexibility to choose whether to freeze their category relationships because those carriers’ size, cost structures, and investment patterns vary widely.149 For similar reasons, we conclude that the burden on electing carriers, were we to require all impacted carriers to unfreeze and update their category relationships, would outweigh any benefits, and thus grant these carriers the flexibility to choose. For example, some carriers may have based their current business plans and investment on a continuation of the freeze since it has been in effect for such a long period and compelling these carriers to unfreeze their categories now could be disruptive. Further, it would impose a disproportionate burden on companies with cost structures that have not changed significantly enough to warrant the administrative costs that these carriers would incur in updating their relationships. Moreover, the process of unfreezing and updating category relationships is resource-intensive, requiring carriers to develop detailed analyses for new categorization cost studies. As a result, we recognize that some electing carriers may choose not to unfreeze their category relationships in conjunction with setting initial incentive regulation rates for lower capacity circuit-based business data services because of the administrative costs they would incur in updating these relationships. We see no need to require that electing carriers incur these costs, particularly since one of the principal goals of this proceeding is to reduce unnecessary regulatory burdens.

52. In adopting this option, we reject NARUC’s contention that we are violating section 410(c) of the Communications Act by failing to meaningfully consult with, and receive a recommendation from the Joint Board.150 Section 410(c) applies only to the extent the Commission engages in “the jurisdictional separation of common carrier property and expenses between interstate and intrastate operations.”151 Here, we are not engaged in that process. Instead, we are determining which costs electing carriers should use to calculate their incentive regulation rates for lower capacity circuit-based BDS. In allowing electing carriers to set those rates using data from 2018, rather than 2000, we make no change to the jurisdictional separations rules.

53. As set forth more fully below, we direct each electing carrier that chooses to update its separations category relationships to conduct two cost studies for 2018 and to use those cost studies in determining its initial incentive regulation rates. In so doing, we are exercising our authority over interstate rates and are not in any way requiring state commissions to make similar intrastate adjustments.152 On the contrary, our forbearance from application of the separations rules to electing

(Continued from previous page) offers of A-CAM support or otherwise transitioning away from legacy support mechanisms will already have unfrozen their category relationships.149 2001 Separations Freeze Order, 16 FCC Rcd at 11393-94, paras. 18, 21.150 47 U.S.C. § 410(c); NARUC Reply, CC Docket No. 80-286, at 5, 9 (filed Sept. 10, 2018) (citing 47 U.S.C. § 410(c)); see Letter from Colorado Dept. of Regulatory Agencies to Ajit Pai, Chairman, FCC, et al., WC Docket No. 17-144, CC Docket 80-286 (Sept. 5, 2018) (stating that Section 410(c) unambiguously requires that the Commission shall refer changes in the separations rules to the Joint Board for a recommended decision and the Commission “should not act . . . absent a Joint Board recommendation”); NARUC Comments at 9-10, CC Docket No. 80-286 (filed Aug. 27, 2018) (asserting that “the proposal” in CC Docket No. 80-286 “to allow carriers to adjust their category relationships [is] exactly the type[] of Jurisdictional cost-shifting issue[] Congress specified must be referred to the Separations Joint Board” (internal footnote omitted)).151 47 U.S.C. § 410(c).152 These adjustments are similar to those the Bureau required in connection with a waiver permitting Eastex Telephone Cooperative, Inc. to update its separations category relationships to more accurately reflect its network investments. See Petition by Eastex Telephone Cooperative, Inc. Pursuant to 47 C.F.R. Sections 36.3, 36.123-126,


23

carriers will allow the states to adopt their own rules for determining the costs carriers incur in providing intrastate services to the extent they have authority under state law.153

54. Moreover, even if we were to interpret 410(c) so broadly as to be applicable to the opportunity we provide electing carriers to unfreeze their category relationships, our actions are not in conflict with our obligations under section 410(c). In 2009, the Commission asked the Joint Board to consider whether the Commission should allow carriers a one-time opportunity to unfreeze their separations category relationships and requested that the Joint Board prepare a recommended decision on that matter.154 No recommendation has been forthcoming. Section 410(c) directs that, after a referral, the Joint Board “shall prepare a recommended decision for prompt review and action by the Commission.”155 Nothing in section 410(c) obligates the Commission to wait indefinitely for a recommended decision before acting. We conclude that the only reasonable interpretation of this statutory language allows the Commission to act unilaterally where, as here, an issue has been pending before the Joint Board for more than nine years without a recommended decision. Any contrary interpretation would allow the Joint Board to indefinitely delay Commission action. Congress could not have intended that result while requiring that that the Commission act promptly once the Joint Board issues a recommended decision.

55. Section 410(c) also requires that the Commission “afford the State members of the Joint Board an opportunity to participate in its deliberations” on “decisional action[s]” regarding matters that have been referred to the Joint Board.156 To the extent this provision can be read as applying to this proceeding, the notice and comment periods and permit-but-disclose rules governing this proceeding have provided plenty of opportunity for the state members of the Joint Board to voice their opinions on allowing electing carriers to opt out of the category relationships freeze.

56. Implementation. To ensure that updated category relationships are properly reflected in incentive regulation rates, we require each electing carrier that chooses to update its frozen category relationships to conduct two 2018 cost studies—one based on frozen category relationships and one based on unfrozen relationships. To determine its incentive regulation rates for BDS, the carrier shall divide the BDS costs under the revised 2018 cost study by the BDS costs determined in the original 2018 cost study using frozen category relationships to develop a rate adjustment factor.157 The carrier shall apply this factor to the initial (prior to adjustments for the X-factor, inflation factor, and any exogenous cost

(Continued from previous page) 36.152-157, and 36.372-382 for Commission Approval to Unfreeze Part 36 Category Relationships, CC Docket No. 80-286, Order, 27 FCC Rcd 6357 (WCB 2012) (Eastex Waiver Order).153 See infra III.E.2. (Implementing Forbearance).154 Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Report and Order, 24 FCC Rcd 6162, 6166, 6168, 6171, paras. 14, 19, 29 (2009); see Letter from James B. Ramsay, General Counsel, NARUC, to Marlene H. Dortch, Secretary, FCC, CC Docket No. 80-286 et al., at 6 (filed Sept. 19, 2018) (acknowledging that the issue whether to allow carriers to opt out of the category relationships freeze is “squarely within the scope of the existing referral”).155 47 U.S.C. § 410(c). See also In re FCC 11-161, 753 F.3d 1015, 1086 (10th Cir. 2014) (finding the Commission has “the authority and discretion” to make the determination that a particular proceeding concerns substantive jurisdictional separations reform); Crocket Telephone Co. v. FCC, 963 F.2d 1564, 1571 (D.C. Cir. 1992) (concluding the procedures outlined in sections 221(c) and 410 (c) “are mandatory when the Commission chooses to adopt a formal separations methodology”); see also State Corp. Comm’n of the State of Kansas v. FCC, 787 F.2d 1421, 1426 (10th Cir. 1986) (noting that the limits placed on State members in section 410(c) “confirm[] the purely advisory role of the states”).156 47 U.S.C. § 410(c). 157 The following equation sets forth this calculation:

BDSR ÷ BDSO = RAFBDS

where BDSR equals the BDS costs under the revised cost study, BDSO equals the BDS costs under the original cost study, and RAFBDS is the rate adjustment factor for BDS.


24

changes) rates established in accordance with the procedures explained elsewhere in this Order to set the carrier’s initial rates for lower capacity circuit-based BDS under incentive regulation. The carrier shall adjust these rates for the X-factor, inflation factor, and any exogenous cost changes and may adjust these rates to reflect any pricing flexibility allowed among services within the special access basket. Carriers that elect incentive regulation effective as of July 1, 2020 will follow these directions, except that if an electing carrier chooses to update its frozen category relationships it will conduct two 2019 cost studies and use the results of these cost studies to complete the steps described in this paragraph.

57. Unfreezing separations category relationships could result in a carrier recovering the same costs through higher BDS rates and unchanged switched access recovery. Incorporating updated category relationships into the 2018 cost study, or 2019 cost study for carriers electing the January 1, 2020 effective date, will change the costs assigned to the switched access category just as it will for BDS. The USF/ICC Transformation Order capped all interstate switched access rates at 2011 levels, subject to specified reductions over time. We do not permit electing carriers to increase their switched access rate caps. Unless cost reductions to interstate switched access are reflected in a carrier’s revised base period revenue amount, a carrier will double-recover costs through its interstate switched access rates.158 To account for this effect, an electing carrier that unfreezes its separations category relationships must calculate the difference between the interstate switched access costs in the two 2018 cost studies. Each electing carrier must adjust its base period revenue by an amount equal to the interstate switched access cost difference between the two 2018 cost studies before applying the annual 5% reduction to the base period revenue. This is the process that the Commission employed in the Eastex proceeding.159 Carriers electing a January 1, 2020 effective date will do the same with 2019 cost studies.

58. An electing carrier that participates in the NECA interstate switched access tariff must report to NECA the interstate switched access cost difference between the two 2018, or, 2019, studies and its revised base period revenue amount. These procedures protect both carriers and customers from any unintended consequences of moving BDS from rate-of-return regulation to incentive regulation. Any electing carrier that opts out of the category relationships freeze shall include, in its 2019 or 2020, respectively, annual filing, workpapers showing how it implemented the measures set forth above. This does not eliminate the need for an electing carrier to adjust its Eligible Recovery for any other instances of double recovery.160 Finally, we require NECA to reflect these base period revenue changes in its settlement procedures.

59. We find that these measures provide a reasonable and not unduly burdensome method for ensuring that costs shifted from an electing carrier’s unfreezing of its category relationships are carried forward into its incentive regulation rates for BDS without any double-recovery. Each electing carrier that chooses to update its category relationships will necessarily need to perform detailed calculations to implement that choice. We minimize the associated burdens by specifying that the electing carrier adjust its business data service rates to account for the changes in the category relationships using the 2018 cost study, or the 2019 cost study for carriers electing to convert effective July 1, 2020, that this Order requires of all electing carriers and therefore will impose only a minimal incremental burden on electing carriers.

3. Special Access Basket, Categories, and Subcategories

60. We retain the special access basket, categories and subcategories,161 and the attendant rules governing the allowed annual rate adjustments for price cap regulation for incentive regulation.162

158 See generally Eastex Waiver Order.159 Id. 160 47 CFR § 51.917(d)(viii). 161 See Notice at 11, para. 23.162 See 47 CFR § 61.46.


25

Commenting parties support this approach.163 The category and sub-category requirements limit the degree to which a carrier can raise rates for particular groups of services in any given year. Each electing carrier that elects incentive regulation must set its initial price cap indexes for the special access basket and associated service band indices at 100 and use the rate adjustment rules for price cap carriers contained in sections 61.45 to 61.48 of our rules, as appropriate, to reflect the prescribed productivity factor, the inflation factor, and any required exogenous cost adjustment in the price cap index. These steps will ensure that the carrier’s actual price index does not exceed its price cap index, and that its service band indexes for each category or subcategory do not exceed their upper limits.164

4. Productivity X-factor and Measure of Inflation

61. Consistent with the price cap BDS Order,165 we adopt 2.0% as the productivity factor (X-factor) and the Gross Domestic Product-Price Index (GDP-PI) as the inflation factor used to adjust price cap indexes in the first year of incentive regulation, and each year thereafter.166 As proposed in the Notice, we decline to incorporate a consumer productivity dividend adjustment into the X-factor.167

62. Background. Under price cap regulation, the price cap index seeks to replicate the beneficial cost-reducing incentives of a competitive market by limiting the prices that a price cap LEC may charge for services.168 After price cap carriers set initial price cap indexes based on going-in rate levels, these indexes are adjusted annually based primarily on the productivity factor (X-factor) and inflation factor (GDP-PI) as well as any exogenous cost adjustments. The X-factor adjustment is intended to capture the amount by which incumbent LECs could be expected to outperform economy-wide productivity gains and to pass those gains on to consumers in the form of lower prices. In the past, the Commission has also applied a consumer productivity dividend adjustment to the X-factor to capture for ratepayers a portion of the benefits from expected productivity gains exceeding those incumbent LECs had historically achieved under rate-of-return regulation.169 The inflation factor is intended to adjust prices to capture economy-wide rates of inflation.170 Historically, the Commission has used the U.S. Department of Commerce’s Bureau of Economic Analysis’s GDP-PI, a chain-weighted index of overall national prices, as the inflation factor.171

63. In the BDS Order, the Commission adopted for price cap carriers a 2.0% productivity-based X-factor and retained GDP-PI as the inflation factor but declined to apply a consumer productivity dividend adjustment.172 The Commission found that 2.0% reflects its best estimate of the productivity growth that incumbent LECs will experience in the provision of BDS services relative to productivity

163 Petitioners’ Comments at 9; Sprint Comments at 5.164 See 47 CFR § 61.45-48.165 See Notice at 12, paras. 24-26; BDS Order, 32 FCC Rcd at 3543-57, paras. 197-236. 166 See Notice at 12, para. 24; BDS Order, 32 FCC Rcd at 3557, para. 237. Here, “productivity” refers to total factor productivity (TFP), heuristically the ratio of outputs to inputs. See id. at 3600-01, Appx. B, para. 7 n.11 (citing Robert M. Solow, Technical Change and the Aggregate Production Function, 39 Rev. Econ. & Stat. 312-320 (1957); Dale W. Jorgenson and Zvi Griliches, The Explanation of Productivity Change, 34 Rev. Econ. Stud. 249-283 (1967)).167 Notice at 12, para. 24; see BDS Order, 32 FCC Rcd at 3562, para. 253. 168 BDS Order, 32 FCC Rcd at 3545, para. 202. 169 See BDS Order, 32 FCC Rcd at 3562, para. 253; Price Cap Order, 5 FCC Rcd at 6799, para. 124; id. at 6799, para. 100.170 BDS Order, 32 FCC Rcd at 3562, para. 253. In the Commission’s price cap formula, the X-factor is subtracted from GDP-PI. Id. at 3544, para. 198.171 Id. at 3557, para. 237. 172 Id. at 3543-44, para. 197.


26

growth in the overall economy.173 To determine the X-factor, the Commission applied a total factor productivity methodology, which measures the relationship between the output of goods and services to inputs.174 The Commission applied this methodology to the U.S. Bureau of Labor Statistics’ Capital, Labor, Energy, Materials, and Services (KLEMS) dataset for the broadcasting and telecommunications industries for estimating incumbent LEC productivity and input prices.175 The Commission used these data to establish a zone of reasonable X-factor estimates based on four relevant time periods, and from this zone selected an X-factor of 2.0%.176 The Commission also retained GDP-PI as the measure of inflation.177 Accordingly, price cap LECs adjust their price cap indexes annually by the 2.0% X-factor and GDP-PI to ensure just and reasonable rates for these BDS services.178

64. Discussion. Consistent with the BDS Order, we adopt 2.0% as the productivity factor electing carriers will use to adjust their price cap indexes.179 In so doing, we reaffirm the Commission’s finding in the BDS Order that the 2.0% X-factor represents our best estimate of BDS productivity gains or losses relative to the general economy and is a reasonable productivity factor with which to adjust price cap indexes for purposes of incentive regulation.180

65. WTA opposes adoption of the 2.0% productivity X-factor for incentive regulation, contending that “given increasing broadband-related labor costs and the fact that the typical WTA member has only 10-to-20 employees, it does not appear possible for many small A-CAM and Alaska Plan companies to achieve productivity gains of two percent each year.”181 We believe, however, that the 2.0% X-factor is the most reliable estimate of BDS productivity growth for carriers generally, including smaller carriers. The 2.0% X-factor was the product of an economically-sound total factor productivity methodology, consistent with past Commission practice,182 using the only reliable and internally consistent dataset in the record in the BDS proceeding, KLEMS, for measuring incumbent LEC productivity and input prices.183 WTA focuses on one type of input price—labor costs—for which KLEMS captures telecommunications industry trends, including broadband-related trends, for carriers of all sizes.184 WTA implicitly assumes that its members’ labor costs will rise more quickly (or fall more

173 Id.174 Id. at 3545-47, paras. 202-06. 175 Id. at 3544-45, 3547-51, 3603-8, paras. 201, 207-16 & Appx. B at paras. 15-24; see U.S. Dept. of Labor, Bur. of Labor Statistics (BLS), Multifactor Productivity, Nonmanufacturing Sectors and NIPA-level Nonmanufacturing Industries KLEMS Multifactor Productivity Tables by Industry, http://www.bls.gov/mfp/mprdload.htm.176 BDS Order, 32 FCC Rcd at 3551, para. 217. 177 Id. at 3557, para. 237.178 Id. at 3543-44, para. 197. 179 See Notice at 12, paras. 24-26; BDS Order, 32 FCC Rcd at 3543-57, paras. 197-236.180 BDS Order, 32 FCC Rcd at 3547-51, paras. 207-16.181 WTA Comments at 5.182 BDS Order, 32 FCC Rcd at 3545-46, paras. 202-06. 183 Id. at 3547-51, 3603-8, paras. 207-16; id. at Appx. B, paras. 15-24. 184 Id. at 3468, para. 15 & n.28. As noted in the BDS Order, industries in the telecommunications subsector (NAICS 517) “provide telecommunications and the services related to that activity (e.g., telephony, including Voice over Internet Protocol (VoIP); cable and satellite television distribution services; Internet access; telecommunications reselling services)” and are “primarily engaged in operating, and/or providing access to facilities for the transmission of voice, data, text, sound, and video,” which “may be based on a single technology or a combination of technologies.” BLS, Industries at a Glance, Telecommunications: NAICS 517, http://www.bls.gov/iag/tgs/iag517.htm (last visited Oct. 23, 2018).

http://www.bls.gov/mfp/mprdload.htm

http://www.bls.gov/iag/tgs/iag517.htm

http://www.bls.gov/iag/tgs/iag517.htm


27

slowly) than price cap carriers’ labor costs.185 Even if we were to accept this assumption, WTA does not address whether other factors affecting BDS productivity growth, such as changes in BDS demand, offset any disparity in the rate of change in labor costs.

66. The Commission sought comment on alternative X-factors for electing carriers but received no data or other information that would allow us to calculate an alternative X-factor.186 And while WTA provides anecdotal data on a selected portion of its members’ costs, it has “not submitted the company-specific input price and output data that we would need to quantify” the extent to which its members’ productivity growth and ability to recover costs deviate from the industry average.187 In the BDS Order, the Commission declined to adjust the X-factor to account for conflicting and unquantifiable evidence in the record that the KLEMS dataset overstated or understated productivity growth.188 And the Eighth Circuit Court of Appeals upheld the Commission’s decision not to adjust the KLEMS dataset “in light of the conflicting evidence on what sort of adjustment was appropriate.”189 In these circumstances, we see no valid basis on which to adopt an alternative X-factor.

67. Notwithstanding WTA’s concerns, we believe that most electing carriers will be able to achieve the 2.0% X-factor. Petitioners support our use of a 2.0% X-factor, even though they state that rate-of-return carriers may generally achieve lower productivity growth than price cap carriers, and TDS Telecom endorses the regulatory framework adopted in the BDS Order that includes a 2.0% X-factor.190 Given that rate-of-return carriers receiving fixed support are not required to move to incentive regulation, carriers unable to achieve the 2.0% X-factor will avoid any harm by simply not electing incentive regulation. The voluntary nature of incentive regulation therefore renders moot any risk involved in attempting today to determine what an appropriate productivity factor would be for this group of carriers.191 Carriers themselves are in the best position to determine whether they will benefit from incentive regulation and we have afforded them that flexibility.

68. Inflation Factor. We adopt GDP-PI as the inflation factor as proposed in the Notice.192 No commenter opposed this proposal.193 As we found in the BDS Order, there is no alternative measure of inflation presented in the record that is as accurate as GDP-PI in the medium- and long-term and that is not susceptible to carrier influence or manipulation.194 Accordingly, electing carriers will adjust their price cap indexes by GDP-PI during the first year of incentive regulation, and each year thereafter.

69. Consumer Productivity Dividend. We decline to incorporate a consumer productivity dividend adjustment into the X-factor adopted in this Order.195 No commenter opposed this proposal in the Notice. In the BDS Order, the Commission found that the 2.0% X-factor reflected all anticipated future BDS productivity growth and declined to include a consumer productivity dividend adjustment in

185 See WTA Comments at 5. 186 See Notice at 12, para. 25 (seeking comment on using a different productivity factor for electing A-CAM carriers than we use for price cap carriers and requesting specificity on how their proposed X-factor is derived).187 BDS Order, 32 FCC Rcd at 3555, para 231.188 Id. at 3553-55, paras. 225-31.189 Citizens Telecomms. v. FCC, 901 F.3d at 1013-14. 190 Petitioners’ Comments at 9; TDS Telecom Comments at 2. 191 See Price Cap Order, 5 FCC Rcd at 6799, para. 106. 192 Notice at 12, para. 24.193 See Petitioners’ Comments at 9.194 BDS Order, 32 FCC Rcd at 3557, para. 237.195 Notice at 12, para. 24.


28

the X-factor.196 For similar reasons, and to avoid regulatory disparity with price cap regulation, we decline to include a consumer productivity dividend in the X-factor for incentive regulation.197

5. Exogenous Costs

70. After reviewing the record, we adopt the proposal in the Notice that exogenous costs be allocated based on a ratio of BDS revenues to total revenues from all regulated services and an electing carrier’s universal service support payments.198 Exogenous costs are those costs that are beyond the control of the carrier, as determined by the Commission.199 We agree with Petitioners that allowing exogenous cost adjustments is appropriate.200 When costs are beyond the carrier’s control, they are often of a nature that is not reflected in the measurement of productivity.201 It is therefore appropriate to allow adjustments to reflect exogenous events upon Commission approval.

71. We reject Sprint’s proposal that any exogenous cost changes should be limited by applying the ratio of BDS revenues to total enterprise revenues.202 Sprint does not define “total enterprise revenues” or explain why it would result in a more relevant comparison to BDS revenues than using total regulated revenues, and we find it too expansive for use here. The exogenous costs being allocated are those associated with regulated services as determined by the Part 64 allocation rules for assigning costs associated with non-regulated activities. Thus, we find that regulated BDS revenues compared to all regulated revenues and related support receipts is the most relevant relationship to allocate a portion of exogenous costs related to regulated services to BDS.

72. Finally, we will not require electing carriers to incur the costs of filing a short form tariff review plan as price cap carriers are required to do.203 In recent years, the Bureau has waived the requirement that price cap LECs file the short form, finding that it would provide little value to the Commission, industry, and consumers.204 We find that the short form tariff review plan would also provide little value to the Commission, industry, and consumers in conjunction with incentive regulation for electing carriers. We accordingly do not require its filing.

6. Low-end Adjustment

73. We adopt the low-end adjustment mechanism proposed in the Notice to provide an appropriate backstop to ensure that electing carriers are not subject to protracted periods of low earnings.205 A below-normal rate of return over a prolonged period could threaten a carrier’s ability to raise the capital necessary to provide modern, efficient services to customers.206 The low-end adjustment mechanism will permit a one-time adjustment to a single year’s BDS rates to avoid back-to-back annual

196 BDS Order, 32 FCC Rcd at 3562, para. 253. 197 See id. 198 Notice at 12-13, para. 27.199 See Price Cap Order, 5 FCC Rcd at 6792, 6807-10, paras. 48, 166-90. Exogenous costs adjustments allow a carrier to modify its rates to reflect changes outside its control. Id.200 See Petitioners’ Comments at 9.201 Price Cap Order, 5 FCC Rcd at 6807-08, paras. 166-79.202 Sprint Comments at 5.203 47 CFR § 61.49(k).204 See July 1, 2018 Annual Access Charge Tariff Filings, WC Docket No. 18-100, Order, DA 18-335, at 3-4, paras. 6-7 (WCB 2018); Materials to be Filed in Support of 2017 Annual Access Tariff Filings, WC Docket No. 17-65, Order, 32 FCC Rcd 3878, 3879, para. 3 (WCB 2017). 205 Notice at 13, para. 28.206 Price Cap Order, 5 FCC Rcd at 6804, para. 147.


29

earnings below a set benchmark.207 This course should allow electing carriers to meet their existing obligations to debtholders and attract sufficient capital while continuing to provide BDS.

74. We reject Sprint’s argument that any low-end adjustment should be allowed only if a sharing mechanism is adopted for a carrier’s earnings. A sharing mechanism is a process that allocates a portion of a carrier’s excess earnings under price cap regulation to the consumer through a one-time reduction in a carrier’s price cap index. The Commission eliminated the sharing mechanism for price cap carriers in 1997.208 There is no causal link between the low-end adjustment mechanism and earnings sharing, and the two have not previously been tied together in other incentive regulation programs. The BDS Order allowed a low-end adjustment without a sharing mechanism and Sprint provides no convincing basis for diverging from that approach.209

75. We use 100 basis points below the authorized rate of return for rate-of-return carriers as the benchmark for establishing the low-end adjustment as we did in the BDS Order. This approach will approximate the transition to the authorized rate of return of 9.75%. A carrier asserting a claim for a low-end adjustment bears the burden of showing that its return is below the prescribed benchmark and that the revised rate(s) are consistent with the benchmark.

76. Finally, as the Commission proposed in the Notice, electing carriers that exercise downward pricing flexibility (for example, by entering into a contract tariff with a customer), or use generally accepted accounting principles (GAAP) rather than the Part 32 Uniform System of Accounts, will be ineligible for a low-end adjustment. No party has opposed this limitation to the availability of the low-end adjustment mechanism. This limitation is consistent with that imposed in the BDS Order, and we see no reason to diverge from that approach here. 210

7. Pricing Flexibility for Lower Capacity TDM Transport and End User Channel Termination Services

77. We adopt the proposal in the Notice to grant pricing flexibility to electing carriers for their lower capacity TDM transport and end user channel termination services under incentive regulation similar to the pricing flexibility the Commission granted to price cap carriers’ lower capacity TDM end user channel terminations in areas deemed non-competitive.211 We agree with commenters that permitting electing carriers to offer contract tariff pricing and volume and term discounts will benefit both carriers and customers and will promote competition in electing carriers’ BDS markets.212 Requiring that electing carriers also maintain generally available tariff rates for their lower capacity TDM transport and end user channel termination services will ensure that the rates of customers that do not negotiate contract-based or term and volume discounted rates for such services will continue to be just and reasonable. Additionally, we condition this grant of pricing flexibility on the requirement that electing carriers remove contract tariff demand from the relevant incentive regulation basket for purposes of determining their price cap indexes and actual price indexes, which will ensure that those customers that do not negotiate contract tariffs will not cross-subsidize customers that do.

207 Pricing Flexibility Order, 14 FCC Rcd at 14307, para. 168. 208 See Price Cap Performance Review for Local Exchange Carriers, CC Docket No. 94-1, Fourth Report and Order, CC Docket No. 96-262, Second Report and Order, 12 FCC Rcd 16642, 16700-03, paras. 148-55 (1997), aff’d in part & rev’d in part sub nom. USTA v. FCC, 188 F.3d 521 (D.C. Cir. 1999).209 BDS Order, 32 FCC Rcd at 3560-62, paras. 248-53; see Sprint Comments at 5.210 BDS Order, 32 FCC Rcd at 3560-62, paras. 249-52.211 Notice at 8, para. 12. 212 See Sprint Comments at 5 (“[i]n most cases, volume and term discount plans have proven to be beneficial to both purchaser and vendor”); Petitioners’ Comments at 10 (“[s]uch offerings are necessary in rural counties in order to provide economical services to schools and libraries, to retain business customers, as well as to meet the needs of wireless backhaul services.”).


30

C. Removal of Ex Ante Pricing Regulation of Lower Capacity TDM End User Channel Termination Services in Areas Deemed Competitive

78. As part of our framework for moving electing carriers to less intrusive pricing regulation of their BDS offerings, we adopt a competitive market test to identify those areas served by electing carriers where competition or potential competition for lower speed (DS3 or less) TDM end user channel termination services justifies removing ex ante pricing regulation for those services. In adopting a competitive market test for electing carriers, we are guided by the Commission’s previous work in developing a competitive market test for price cap carriers’ BDS offerings. At the same time, we are persuaded by commenters that argue that the competitive market test should rely on evidence of competition in the study areas served by electing carriers.213

79. We adopt a competitive market test for electing carriers that is based on a modified version of the second prong of the BDS Order competitive market test, which uses publicly available Form 477 data to measure whether a cable operator offers a minimum of 10/1 Mbps in 75% of census blocks in a study area served by a price cap provider. We will apply this test in electing carriers’ study areas, and in those study areas deemed competitive by the competitive market test, we remove ex ante pricing regulation of lower capacity TDM end user channel terminations.

80. We are also constrained in the development of a competitive market test by the limited availability of data in the record regarding competition for BDS services in the study areas served by eligible rate-of-return carriers.214 We decline, however, to adopt any of the options we proposed in the Notice for a competitive market test that would require a new data collection. Commenters strongly oppose a new information collection, arguing it would be burdensome and unnecessary.215 We agree. A new information collection for electing carriers would be especially burdensome given their relatively smaller size. The Commission similarly declined to require a new data collection even for larger price cap carriers in the BDS Order, as part of deciding to update the price cap competitive market test results, finding that the burdens would outweigh the benefits, and the burden of collecting the information would be considerable.216 Additionally, the burdens associated with an information collection could reduce incentives for eligible carriers to elect incentive regulation, counter to our goals. A simple, administrable test will ensure more resources are available for competition and deployment in electing carriers’ study areas.

81. In the Notice, we sought comment on whether to include lower capacity TDM transport services in the competitive market test.217 Given the lack of data in our record, we find that including such transport services would be unworkable at this time. We therefore decline to adopt a competitive market test for lower capacity TDM transport in electing carriers’ study areas but seek comment on adopting such a test in the accompanying Further Notice.

1. Criteria for a Competitive Market Test

82. In this section, we address appropriate criteria for a competitive market test for electing carriers’ lower speed TDM end user channel termination services, including the appropriate product market, number of competitors in a market, and geographic market.

213 AT&T Comments at 14.214 See; Sprint Comments at 2 (“Commission currently does not have the information necessary to accurately evaluate the level of competition in [rate-of-return] ILEC service areas . . . .”).215 BDS Order, 32 FCC Rcd at 3527-28, paras. 147-48 (declining to require a new data collection in updating price cap competitive market test results); see also AT&T Comments at 15 (“initiating a new data collection would be a time-consuming and burdensome exercise”); AT&T Reply at 7-8; Petitioners’ Reply at 7. 216 BDS Order, 32 FCC Rcd at 3527, para. 147.217 Notice at 15, para. 35.


31

83. Product market. When defining a product market, to ensure our action affects an appropriate group of services, we look to which services are sufficiently similar to reasonably be considered substitutes.218 We find the Commission’s analysis of the relevant market in the BDS Order219 to be applicable to the current situation, and, therefore find the relevant product market includes circuit- and packet-based business data services, legacy hybrid-fiber-coaxial, and copper.220 For the same reason, we find that the product market also includes unbundled network elements, dark fiber, and fixed wireless services and facilities used to provision BDS.221 These services play competitive roles in BDS markets. While the Commission did not find best-efforts services to be close substitutes for all types of BDS in the BDS Order, we acknowledge here as the Commission did there that they nonetheless place a degree of competitive pressure on BDS suppliers, particularly for lower capacity services.222 Further, we believe a best-efforts supplier with its own ubiquitous wireline network has strong incentives to supply BDS to locations where it currently does not, and all the more so to the extent that an existing supplier is charging supra-competitive prices.223 We also continue to expect that suppliers exercising any short-term market power generally will be constrained by supply-side substitution over the medium term (3-5 years) in locations where other providers, such as cable companies, offer best-efforts or other telecommunications services over their own facilities.224 We therefore find that the product market analysis that the Commission conducted for price cap areas in the BDS Order applies equally to electing carrier areas.225

84. Competition Within a Study Area. We must also determine the appropriate level of competition for any competitive market test. The Commission, in the BDS Order determined that a “combination of either one competitive provider with a network within a half mile from a location served by an incumbent LEC or a cable operator’s facilities in the same census block as a location with demand will provide competitive restraint” more effectively than legacy regulation.226 The Commission decided that a “nearby” BDS competitor provides sufficient competition after analyzing three findings: (1) the geographic scope within which a likely BDS provider can realistically compete with an incumbent LEC; (2) a finding that one competitor in addition to the incumbent LEC provides a reasonable degree of competition; and, (3) the benefits of competition outweigh the potential unintended costs of regulation.227

85. We do not have data showing where there is a competitive provider with a network half a mile from a location served by carriers eligible to elect the lighter touch regulatory framework we adopt today. We do, however, have Form 477 data which is organized on a census block-level. We can

218 Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962); R.R. Donnelley & Sons Co., 120 F.T.C. 36, 153 (1995) (describing the relevant product market as “the smallest grouping of products whose sellers, if unified by a hypothetical cartel or merger, could profitably increase prices significantly above the competitive level”).219 AT&T Comments at 15, n.49 (arguing that after the long BDS proceeding, “there is no need for the Commission now to reinvent the wheel on the building blocks of the CMT such as the relevant product market . . . .”). 220 BDS Order, 32 FCC Rcd at 3469-70, paras. 21-27.221 Id. at 3476-79, paras. 32-38.222 Id. at 3474-75, paras. 30-31.223 Id. at 3521, para. 135. 224 Id. at 3467-68, paras. 13-15.225 Id. at 3470-71, paras. 22-24; see also AT&T Comments at 15 n.49 (claiming that there is “there is no need for the Commission now to reinvent the wheel on the building blocks of the CMT such as the relevant product market . . . .”). 226 BDS Order, 32 FCC Rcd at 3512-13, paras. 117-118. 227 The BDS Order relied upon data from the 2015 Collection to show that “providers actively compete for customers located within about a half mile from their networks,” and that providers are commonly willing to extend existing network out approximately a half mile to meet demand. Id. at 3512, para. 118. Although the data in the 2015 Collection was limited to price cap study areas, we adopt the same findings to support the competitive market test for rate-of-return study areas. There is no evidence in the record to contradict these findings.


32

therefore identify the census blocks served by an electing carrier where cable broadband services are also deployed. We find it appropriate to use cable broadband in the census blocks that comprise the electing carrier’s study area as a proxy for competition because, as the Commission previously determined, “cable companies have focused investment on building fiber networks for higher-bandwidth Ethernet services, which is enabling them to overcome limitations of traditional coaxial-based cable systems that cannot meet higher bandwidth demand.”228 Cable providers have shifted to offering “higher (and more competitive) bandwidths.229 At the same time, cable operators’ best efforts (and Ethernet over Hybrid Fiber-coaxial (EoHFC)) services continue to compete effectively against incumbent LECs’ lower speed TDM services.230 The Commission also found that because cable operators have “aggressive[ly] deploy[ed]” it was “highly likely the cable-only measure found in the Form 477 data will capture the vast bulk of additional deployments; it is likely that most non-cable competitive extension of business data services networks will occur where cable is also deploying or has already deployed.”231 This rationale is equally applicable to electing carriers’ provision of BDS in their study areas.

86. As the Commission found in the BDS Order, and as the Eighth Circuit Court affirmed,232 a single wireline competitor provides a substantial competitive effect by disciplining rates, terms, and conditions to just and reasonable levels.233 In industries with large sunk costs, such as wireline providers, the largest impact occurs with the entry of a second provider, with added benefits from additional competitors declining thereafter.234 This is because the presence of a nearby provider is likely to prevent or mitigate substantial abuse of market power, either through lack of innovation or high prices.235 This finding is not challenged in the record. Consistent with the analysis in the BDS Order, we find that the effect of a single BDS competitor is sufficient to limit anticompetitive behavior, and that the presence of a cable network offering a minimum of 10/1 Mbps broadband service in 75% of the census blocks in a study area is sufficient to deem a study area competitive for the purposes of the competitive market test for electing carriers.

87. Geographic Market. We find that an electing carrier’s individual study area is the appropriate geographic market measure for the competitive market test because it is administratively feasible but is granular enough to capture reasonably similar competitive conditions.236 A study area is a geographic segment of a rate-of-return incumbent LEC’s telephone operations that generally corresponds to the carrier’s entire service territory within a state.237 Incumbent LECs determine eligibility for high-cost universal service support at the study area level, perform jurisdictional separations at the study area

228 Id. at 3485, para. 57.229 Id. at 3488, para. 62.230 Matt Davis, Independence Research LLC, SMB & National Enterprise Market Trends Report: U.S. Telecom Market Sizing and Revenues Share – YE 2017 (abridged) (May 2018), https://independenceresearch.com/research (“from 2016 to 2017, cable increased . . . its small to medium size business (or SMB) market share from 40 to 44 percent”).231 BDS Order, 32 FCC Rcd at 3507, para. 106.232 Citizens Telecomms v. FCC, 901 F.3d at 1010 (upholding the Commission’s cost-benefit analysis regarding the competitive nature of duopolies). 233 BDS Order, 32 FCC Rcd at 3514, para. 120.234 Id. 235 Id. 236 See BDS Order, 32 FCC Rcd at 3508-09, para. 108; Pricing Flexibility Order, 14 FCC Rcd at 14259, para. 71.237 Federal State Joint Board on Universal Service, CC Docket No. 96-45, Order, 19 FCC Rcd 11538, 11543-44, para. 12 (2004).

https://independenceresearch.com/research


33

level and generally tariff their rates at the study area level.238 As a result, the Commission and the industry have substantial experience administering rules on a study area basis. What’s more, a study area is granular enough to capture reasonably similar competitive conditions.239 Rate-of-return study areas vary in size but are significantly smaller than metropolitan statistical areas and generally smaller than counties and are therefore sufficiently granular to assess competitive conditions. Given their mostly rural nature, the average size of a rate-of-return study area is 992.82 square miles, compared to the average county, 1,180.40 square miles, and the average metropolitan statistical area, 2,720.95 square miles.240 Adopting study areas as the geographic market also avoids risk of competitive overlap by, for example, a rate-of-return study area crossing county lines that are deemed competitive and noncompetitive.241

88. We also reject other proposals in the record, including suggestions to build a competitive market test for electing carriers that uses counties or census blocks as the relevant geographic market.242 We agree with Smithville that the selection of counties for use in the price cap competitive market test was “a well-documented effective approach for competitive area evaluation for larger price cap carriers that operate service areas dimensioned at statewide levels but does not work well for carriers that have sub-county service areas.”243 To the extent such proposals seek to assess competition in electing carriers’ study areas based on competition elsewhere within the county, we reject that proposition—any competitive market test must be based on the competitive conditions each carrier faces, not those another carrier faces somewhere else in a county. Additionally, some study areas cross county lines. Using counties would potentially require us to subdivide study areas along county boundaries, which would involve unreasonable administrative burdens and could lead to varying treatment of a single study area depending on the counties in which it is located.

89. In response to the 2017 Public Notice,244 Smithville argues that using census blocks to assess competition in electing carriers’ study areas would be a better approach.245 We decline to adopt census blocks as a geographic measure for our competitive market test. The Commission previously found that census blocks or census tracts are too numerous to efficiently administer.246 Additionally, they can be impacted by changes in demand as small as a single building and could lead to a patchwork of

238 Id. at 11544, para, 12 n.30. 239 See BDS Order, 32 FCC Rcd at 3508-09, para. 108; Pricing Flexibility Order, 14 FCC Rcd at 14259, para. 71.240 See U.S. Census Bureau; 2010 Census Summary File 1; Population, Housing Units, Area, and Density: 2010 - United States -- County by State; and for Puerto Rico https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk. In addition to the geographic area of study areas, data on average number of lines per study area underscore the granularity of using study areas as the geographic market. According to universal service loop data filed by NECA in October 2017, the average number of loops in a rate-of-return study area is 3,288. The median is only 1,590. See U.S. Census Bureau; Delineation Files; Core based statistical areas (CBSAs), metropolitan divisions, and combined statistical areas (CSAs); August 2017 https://www.census.gov/geographies/reference-files/time-series/demo/metro-micro/delineation-files.html241 This eliminates the potentially challenging issue of a study area that crosses two counties, one of which is deemed competitive and one that is not deemed competitive. 242 See Smithville Comments, WC Docket No. 17-144, at 2-3 (July 5, 2017) (Smithville Comments); see also Petitioners’ Comments at 19-20 (arguing generally that the “same marketplace analyses the Commission undertook for price cap carriers apply equally to BDS provided by model-based rate-of-return carriers”).243 Smithville Comments at 2. 244 Wireline Competition Bureau Seeks Comment on Petition for Rulemaking Regarding Regulation of Business Data Services for Model-Based Rate-of-Return Carriers, WC Docket No. 17-144, Public Notice, 32 FCC Rcd 4701 (2017) (2017 Public Notice).245 Smithville Comments at 3.246 BDS Order, 32 FCC Rcd at 3511-12, paras. 115-16.

https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk

https://www.census.gov/geographies/reference-files/time-series/demo/metro-micro/delineation-files.html

https://www.census.gov/geographies/reference-files/time-series/demo/metro-micro/delineation-files.html


34

different regulations that vary from census block-to-census block, or even building-to-building. Study areas, on the other hand, are more administratively feasible because there are a limited number of study areas eligible to elect our BDS regulatory framework.247

2. Competitive Market Test Methodology

90. In this section, we describe the specific structure of the electing carriers’ competitive market test we adopt for electing carriers’ lower capacity TDM end user channel termination services. In determining whether electing carriers with lower capacity TDM-based end user channel termination services (at a DS3 or below), face sufficient competition to allow competition, rather than ex ante pricing regulation, to ensure rates are just and reasonable, we adopt a competitive market test modeled on a modified version of the second prong of the existing price cap competitive market test using data from census blocks served by electing carriers. The second prong of the price cap competitive market test uses Form 477 data to measure whether a cable operator offers a minimum of 10/1 Mbps broadband service in 75% of the census blocks in the price-cap service areas within a county.248 Having decided that we will use only existing data to gauge competition in the study areas served by an electing carrier, for purposes of the electing carriers’ competitive market test, if a cable operator or other competitive provider offers a minimum of 10/1 Mbps broadband service in 75% of the census blocks in an electing carrier’s study area, we will deem the study area competitive.249

91. We set 10 Mbps downstream and 1 Mbps upstream as minimum thresholds for a cable operator’s service to be included in the competitive market test. Setting a minimum threshold ensures that the networks that supply these services are reasonable proxies for the type of network facilities needed to deliver BDS. As we observed in the BDS Order, “when a cable provider is capable of providing Internet broadband service within any census block, then generally they have the incentive to make the incremental investment necessary to serve locations with BDS demand in that census block, especially over the medium term.”250 Cable operators are continuing to invest in and upgrade the capacities of their networks, which give us reasonable assurance that these networks will be capable of providing BDS competition over the short- to medium-term.251 Additionally, the 10/1 Mbps threshold is also the threshold that rate-of-return carriers accepting fixed A-CAM support are required to offer to funded locations.252

92. Using Form 477 data for electing carriers’ study areas is administratively simple for both the Commission and electing carriers. We already regularly require providers to update their Form 477 submissions, so we do not need to undertake a new data collection. Another benefit of the new electing carriers’ competitive market test is the incorporation of the 78 rate-of-return-only counties that cannot be analyzed using the price cap competitive market test.253 Had we decided to allow electing carriers to opt-in to the price cap competitive market test, the competitive status of electing carriers serving any of those 78 rate-of-return-only counties would have been unresolved because they were not included in the original analysis.

93. We recognize that under the electing carriers’ competitive market test, a relatively small percentage of electing carriers’ study areas will be deemed competitive at this time. The current result of the competitive market test we adopt today for rate-of-return carriers receiving fixed support is consistent

247 See, e.g., A-CAM Revised Offer Order, 31 FCC Rcd at 13776, para. 4.248 Id. at 3520, 3526, paras. 132, 142.249 Notice at 16, para. 37.250 BDS Order, 32 FCC Rcd at 3521, para. 133.251 See id. at 3485-86, paras. 55-57.252 47 CFR § 54.308(a)(1).253 25 of the 78 rate-of-return-only counties include a study area for a rate-of-return carrier receiving fixed support.


35

with the rural nature and the nascent deployment of cable in many eligible carriers’ study areas.254 We expect the number of electing carriers’ study areas deemed competitive by the competitive market test will increase as competition grows and cable companies expand their reach. This administratively simple competitive market test ensures that all carriers are included in the electing carriers’ competitive market test and will have an opportunity to be deregulated as competition develops.

3. Declining to Use the Results of the Price Cap Competitive Market Test

94. Notwithstanding Petitioners’ and some other commenters’ request that we use the results of the price cap competitive market test adopted by the Commission in the BDS Order to determine where ex ante pricing regulation should be removed from electing carriers’ lower capacity TDM end user channel termination services, we decline to do so.255 In arguing that the Commission should use the BDS Order price cap competitive market test for electing rate-of-return carriers, some commenters claim “the same marketplace analyses the Commission undertook for price cap carriers apply equally to BDS provided by model-based rate-of-return carriers.”256 While using the results of the existing competitive market test to determine whether an area served by an electing carrier is competitive would be fast, no data in the record support that approach. In fact, the result of the competitive market test we adopt for electing carriers, which results in very few study areas being deemed competitive, underscores our finding that application of the price cap competitive market test results to electing carriers—which would result in far more electing carriers’ study areas being deemed competitive—would not accurately measure competition in the geographic areas served by rate-of-return carriers receiving fixed support.257

95. The BDS Order relied upon the largest information collection in the history of the Commission to analyze and determine the competitive nature of price cap carrier study areas.258 Even if a county contained both price cap and rate-of-return study areas, the Commission’s analysis only included the price cap study area.259 The Commission created the price cap competitive market test after a thorough review of the 2015 Collection, Form 477 data, and established the specific test metrics based upon an informed knowledge of the level of competition that existed and was necessary to protect consumers in the absence of regulation.260 Petitioners, however, offer no data showing the extent of BDS competition in areas served by rate-of-return carriers that receive fixed support. Instead, they argue that the level of competition on a county-by-county basis for price cap carriers’ lower capacity TDM-based BDS offerings is comparable to the level of competition for lower capacity TDM-based BDS offerings of rate-of-return carriers that receive fixed support. The principal support Petitioners offer for this assertion is a study that purports to demonstrate that price cap rural areas immediately proximate to certain A-CAM study areas exhibit sufficiently similar characteristics that we should include A-CAM study areas in the

254 See, e.g., Petitioners’ Study (showing various A-CAM study areas with small percent of census blocks with business cable service offered). 255 Petitioners’ Comments at 18; NTCA Comments at 2; TDS Comments at 4.256 Petitioners’ Comments at 19.257 The dramatic difference between applying the results of the competitive market test the Commission adopted for price cap areas as compared to using the Form 477 data for rate-of-return carriers receiving fixed support, also highlights the error of those commenters that assert that we should use our “predictive judgment to make the inference that rate-of-return markets reasonably resembled the rural territories of price cap carriers,” and “therefore, the existence of competition” in rural areas served by electing carriers warrants the same rules. See Petitioners’ Comments at 21; id. at 19-21. 258 BDS Order, 32 FCC Rcd at 3527, para. 147.259 Id. at 3520, 3527, paras. 133 (“Accordingly, we treat as competitive census blocks in price cap incumbent LEC study areas that the Form 477 data show have a cable presence—whether serving business or residential clients”) (emphasis added); id. at 3527, para. 145. 260 Id. at 3522, para. 137.


36

same competitive market test that we used for price cap carriers.261 We find the Petitioners’ study unpersuasive.

96. The study suffers from several methodological defects. First, the study is not based on a representative sample of electing carriers’ study areas. Instead, it relies solely on Consolidated Communications’ rate-of-return study areas.262 We are doubtful, for example, that the Consolidated study areas are a good proxy for the Alaska rate-of-return carriers that are eligible to elect our new regulatory framework. Second, two of the study’s principal metrics (population and housing density) are unlikely to be the critical drivers of competitive BDS deployment.263

97. Additionally, in some instances the study compares non-urbanized price cap areas with areas served by rate-of-return carriers that receive fixed support that include urbanized areas.264 These areas are not comparable. At least some of the counties included in the study’s comparison were deemed non-competitive by the price cap competitive market test.265 Inclusion in the price cap competitive market test of A-CAM areas in these instances would have no effect on the regulatory status of these study areas. The study does not directly compare study areas with high cable presence with competitive counties and study areas with low cable presence with non-competitive counties, as would be expected if the study was trying to show similarities.

98. The study also compares the percentage of census blocks with cable broadband availability between price cap and nearby A-CAM areas and claims that, on average, “the percentage of Census blocks in Consolidated tracts with cable service (21%) is similar to the surrounding rural price cap tracts (28%).”266 But the study’s use of average percentages obscures wide variations in percentage cable broadband deployment. For price cap study areas, cable broadband deployment was found to be 3.88% to 68.68%. For A-CAM study areas, broadband deployment in areas varied from 0.00% to 89.60%.267 The study further attempts to compare price cap areas with nearby A-CAM areas by claiming that the differences in the percentage of cable broadband deployment between the two sets of areas are small, “only 15 percentage points.”268 This is not small.

99. The study also does not state whether it limited its analysis of cable deployment in rate-of-return study areas to those deployments offering a minimum of 10/1 Mbps. The study may have included residential cable deployments at speeds lower than the threshold the Commission established for

261 Petitioners’ Comments, Exh. D, Connie Wightman, Hal Stringer, and Don Gale, Inteserra Consulting Group prepared for Consolidated Communications, Comparison of Characteristics of Consolidated Communications Rate of Return Study Areas to Adjacent and Surrounding Price Cap Study Areas (dated June 15, 2018) (Petitioners’ Study). 262 Id.; see AT&T Reply at 7. 263 AT&T Reply at 7 (“the fact that the study areas . . . may be similar on their residential profile provides little confidence that their business profiles are similar”). 264 This is evident from an examination of the maps included in the study. Portions of urbanized areas are included in the following three examples: Maine-Community Service, Southwest Ohio-Germantown, and Pennsylvania. See Petitioners’ Study at 27, 41, 45. We also note that in these examples cable broadband deployment percentages were significantly higher than in the other examples included in the study. 265 For example, the Pennsylvania comparison included Fayette County and Greene County. The Southwest Ohio - Germantown comparison included Preble County. Neither of these counties were deemed competitive by the price cap competitive market test, but the Petitioners’ Study relies upon these locations to show that A-CAM counties have higher levels of cable deployment than price cap areas. 266 Petitioners Study at 11.267 Petitioners’ Study at 11. The study concedes that “there are some inconsistencies in the broadband cable availability” but asserts “there is nothing to indicate a major difference in availability between rural price cap tracts and Consolidated ROR study areas as a whole.” Id. 268 Id. at 11.


37

the price cap competitive market test. Any such deployments should not be included in a comparison of price cap and nearby A-CAM areas.

100. We are also unable to rely on the conclusions in the Petitioners’ study since it is based on a misplaced reliance on inaccuracies inherent in the structure of the price cap competitive market test—inaccuracies the Commission acknowledged when it adopted the competitive market test in the BDS Order. In the BDS Order, the Commission conceded that its county-based competitive market test unavoidably included a relatively small number of areas that would be inappropriately regulated or inappropriately deregulated.269 It explained that the only competitive market test that would be free of such inaccuracies would be one that would be run at a building level—with over a million buildings with BDS demand, an administratively unworkable option. It adopted percentage thresholds for both prongs of the competitive market test and employed certain statistical tools to ensure those thresholds were set at levels that would minimize inaccuracies.270 It further reasoned that competitive options would become available for many of these areas in the short- to medium-term given the dynamic nature of the BDS marketplace.271

101. The Petitioners’ study attempts to compare A-CAM areas to some of the very price cap areas most likely to contain these inaccuracies and to argue that these inaccuracies justify inclusion of rural A-CAM areas in the price cap competitive market test. Extrapolating from the characterization of peripheral parts of price cap study areas to A-CAM areas is likely to exacerbate these inaccuracies. And unnecessarily so, since the competitive market test we adopt offers a simple way of estimating competition in A-CAM study areas. Further, these are areas the study concedes typically lack even the most basic evidence of BDS competition. Areas where there is little evidence of competition are also likely areas where there is little to no demand for BDS.

102. Given these methodological and conceptual flaws, we conclude that the Petitioners’ study fails to establish the comparability of price cap and nearby A-CAM areas or provide a reasonable basis on which to include A-CAM areas in the price cap competitive market test. We therefore decline to apply the results of the price cap competitive market test to electing carriers’ serving areas.

4. Updating Competitive Market Test Results

103. Consistent with the BDS Order competitive market test, we eliminate ex ante pricing regulation of circuit-based end user channel terminations at or below a DS3 level in study areas deemed competitive by the electing carriers’ competitive market test. We direct the Bureau to release a Public Notice that lists the results of the competitive market test, and to provide the information on the Commission’s website. We will re-run the electing carriers’ competitive market test every three years to assess whether any additional electing carriers’ study areas meet the 75% threshold. This will identify any additional electing carriers’ study areas that should be deemed competitive. We believe a three-year timeframe balances the need to ensure the electing carriers’ competitive market test remains accurate and the Commission’s desire to avoid disrupting contracts and burdening carriers with overly frequent updates.272 The sunk and irreversible cost of providing business data services and deploying a network represents the biggest barrier to entry for providers. Once the barrier is overcome, the marginal cost of operating is low, so it is unlikely that competition will exit. Thus, electing carriers’ study areas deemed competitive will not be reassessed.273

104. To avoid confusion from both carriers and businesses stemming from updates from the price cap competitive market test and the electing carriers competitive market test, we direct the Wireline

269 BDS Order, 32 FCC Rcd at 3526, para. 143.270 Id. at 3522-25, paras. 137-42.271 Id. at 3481, para. 43. 272 BDS Order, 32 FCC Rcd at 3528, para. 149.273 Id. at 3528, para. 152.


38

Competition Bureau to re-run the three-year updates for both the BDS Order price cap competitive market test, and the electing carriers competitive market test concurrently. Thus, the electing carriers’ competitive market test will initially be re-run in 2020, at the same time as the BDS Order price cap competitive market test, to align the tests’ timing. The re-running of these tests will coincide with the initial running of the test for carriers electing to convert to incentive regulation as of July 1, 2020. After that, both tests will be re-run every three years. This approach will make it easier for stakeholders to determine the regulatory status of price cap and rate-of-return BDS providers since the results will be published all at once and ease the burden on Commission resources. The Bureau shall release a Public Notice that lists newly competitive counties (for price cap areas) and study areas (for electing carriers’ study areas) and shall also provide this information on the Commission’s website. As with the BDS Order competitive market test, parties may challenge the results of the electing carriers’ competitive market test by filing petitions for reconsideration or by seeking full Commission review through an application for review.

5. Removal of Ex Ante Pricing Regulation of Electing Carriers’ Lower Capacity TDM End User Channel Termination Services

105. We remove ex ante pricing regulation from electing carriers’ lower capacity TDM end user channel termination services offered in study areas that are deemed competitive by the electing carriers’ competitive market test. Such services are presumed to be subject to sufficient competitive pressure that removing this layer of regulation will not result in excessive rates. Removing this layer of regulation will reduce unnecessary regulatory burdens and will enable these carriers to contribute to BDS competition in their markets. Such services in such areas will be relieved of ex ante pricing regulation and detariffed in the same manner and with the same transition provisions as we adopt today for electing carriers’ packet-based and higher capacity TDM BDS.274 As with packet-based and higher capacity TDM BDS, we continue to maintain our oversight over these TDM services pursuant to sections 201, 202 and 208 of the Act to ensure rates for these services remain just and reasonable. Lower capacity TDM transport and end user channel termination services in areas deemed noncompetitive by the competitive market test will continue to be subject to the incentive regulation and pricing flexibility we adopt today.275

D. Ending Ex Ante Pricing Regulation for Electing Carriers’ Packet-Based and Higher Capacity TDM BDS Offerings

106. We conclude that electing carriers’ packet-based and higher capacity TDM-based BDS offerings above a DS3 bandwidth level (which includes both higher capacity TDM end user channel terminations and higher capacity TDM transport) should not be subject to ex ante pricing regulation and direct electing carriers to detariff these services following a transition period. Our decision to end ex ante pricing regulation for electing carriers’ packet-based and higher capacity TDM BDS offerings will facilitate competition for and deployment of these packet-based and higher capacity TDM services276 and is consistent with the Commission’s statutory obligation to ensure that rates are just and reasonable.277

107. In the BDS Order, after reviewing an extensive record, the Commission found that in price cap markets nationwide there was no compelling evidence of incumbent LEC market power for

274 See infra III.D. 275 See supra III.C. 276 Comments of AT&T at 15-16 (asserting that removal of ex ante regulation will encourage competitive entry and network investment, also provide incentive to transition to packet-based technologies, and introduce competition and drive down prices); Comments of Sprint at 5 (arguing that reduced regulation will promote competition and lower prices for wireless backhaul services); TDS Telecom Comments at 8 (asserting that eliminating ex ante pricing regulation will spur competition and further attract competitive entry).277 47 U.S.C. § 201(b).


39

packet-based and higher capacity circuit-based BDS.278 Specifically, the record demonstrated that demand for these services was increasing, prices were declining, and competitive investment was growing significantly.279 The Commission also determined that the price cap BDS market for packet-based and higher capacity TDM-based offerings had the characteristics of a bidding market such that even competitors that did not have pre-existing facilities to serve a potential customer were nonetheless capable and willing to bid on requests for proposals by customers, particularly those with higher bandwidth needs.280

108. The record in this proceeding lacks the comprehensive and voluminous data collection available to the Commission in the price cap BDS proceeding.281 But, we recognize that re-creating such a similarly detailed data collection would have been more difficult for rate-of-return carriers that receive fixed support, because they have vastly fewer resources to produce such information and the benefits of such a data collection would likely be far outweighed by its costs.282 Instead, we draw parallels where we can from our conclusions in the BDS Order to inform our analysis of the record in this proceeding.

109. In the BDS Order, the fact that the Commission could not find compelling evidence to suggest market power in packet-based and higher capacity TDM BDS in price cap markets suggests that the same circumstances could exist in electing carriers’ BDS markets. A variety of companies are investing in next generation networks, not legacy networks, to compete via different technologies, which is consistent with a lack of market power. Additionally, demand for high speed BDS exists nationwide. Customer requests for proposals (RFPs) are not restricted to price cap areas but seek proposals for service wherever they have demand.283 Thus, the characteristics of a bidding market that exist in price cap areas are also likely to be present in areas served by rate-of-return carriers that receive fixed support.284

110. Relatedly, there is evidence that the deployment of fiber and sales of packet-based BDS such as Ethernet continue to grow substantially and pervasively. Analysts report that, for the first time, fiber-connected commercial building penetration exceeded 50% in 2017—the availability of optical fiber connectivity to large and medium size commercial buildings in the U.S. increased from 49.6% in 2016 to 54.8% in 2017.285 In 2018, 98% of our nation’s elementary and secondary school districts are served by

278 BDS Order, 32 FCC Rcd at 3499-3500, para. 87. 279 Id. at 3482-83, paras. 46-47; Petitioners’ Comments at 14 (“Ethernet services are rapidly becoming the end user customer’s service of choice.”); TDS Telecom Comments at 8 (claiming that carriers’ “TDM services have been on the decline, while they have seen increases in their Ethernet connections”); AT&T Comments at 15-16.280 BDS Order, 32 FCC Rcd at 3482-83, paras. 46-47. If the carrier won, the bid then it would build out the network to the site. See AT&T Comments at 15 (arguing that rate-of-return carriers bid for backhaul contracts). 281 BDS Order, 32 FCC Rcd at 3528, para. 147 (“The 2015 Collection was the most comprehensive data collection the Commission has conducted . . . .”). 282 Id. (declining to conduct additional information collections because the burden would be “considerable”); AT&T Comments at 15 (acknowledging that “initiating a new data collection would be a time-consuming and burdensome exercise”); Petitioners’ Reply at 7 (asserting that a new data collection “would be even more burdensome on the smaller rate-of-return carriers providing BDS subject to this proceeding”); NTCA Comments at 3 (claiming establishing a competitive market test would be burdensome for service providers). 283 A wireless carrier or bank needing business data services is unlikely to limit its footprint to price cap areas. 284 AT&T Comments at 15 (arguing that rate-of-return carriers bid for backhaul contracts).285 Compare Vertical Systems Group, STATFlash: U.S. Business Fiber Availability Reaches 54.8% (Apr. 5, 2018), https://www.verticalsystems.com/2018/04/05/u-s-business-fiber-availability-reaches-fifty/, with Vertical Systems Group, STATFlash: U.S. Business Fiber Gap Drops to Half (Apr. 19, 2017), https://www.verticalsystems.com/2017/04/18/u-s-business-fiber-gap-drops-to-half/; see also Patrick Brogan, USTelecom, Business Fiber Deployment Accelerates with New Competition and Investment-Friendly Policies (May 30, 2018), https://www.ustelecom.org/blog/business-fiber-deployment-accelerates-new-competition-and-investment-friendly-policies.

https://www.verticalsystems.com/2018/04/05/u-s-business-fiber-availability-reaches-fifty/

https://www.verticalsystems.com/2017/04/18/u-s-business-fiber-gap-drops-to-half/

https://www.verticalsystems.com/2017/04/18/u-s-business-fiber-gap-drops-to-half/

https://www.ustelecom.org/blog/business-fiber-deployment-accelerates-new-competition-and-investment-friendly-policies

https://www.ustelecom.org/blog/business-fiber-deployment-accelerates-new-competition-and-investment-friendly-policies


40

fiber optic or other high speed connections.286 An analyst’s equipment revenue forecast for 2017 to 2022 projects that Ethernet access and aggregation will grow 9% annually.287 The record in this proceeding shows that these growth trends are also apparent in A-CAM carriers’ served areas. For example, TDS Telecom, Great Plains, and Consolidated report a four-year average annual growth rate in Ethernet sales from December 2014 to 2017 of 10.7%, 15.4%, and 38.3%, respectively.288 Over the same periods, these carriers report declines in legacy BDS in study areas that were similar to declines in legacy BDS in price cap areas.289 At the same time, consistent with the Commission’s findings in the BDS Order,290 analysts report actual and forecasted growth in cable revenues, deployment and market share for small to national enterprise customers that are significantly contributing to overall growth and competition in the BDS market.291

111. There are other reasons to believe market power for packet-based and higher capacity TDM business data services is not present in areas served by rate-of-return carriers that receive fixed support. The record shows that large customers have significant bargaining leverage over relatively smaller rate-of-return carriers that receive fixed support, limiting what the carriers may negotiate when bidding on contracts.292 For example, ex ante pricing regulation is unnecessary to protect large and powerful entities, such as wireless carriers, that purchase large quantities of BDS.293

112. The Commission has repeatedly emphasized its preference for relying on competition instead of regulation.294 We seek to minimize the burdens of regulation while ensuring that rates and practices remain just and reasonable. The Commission previously identified packet-based services as the “future of business data services” that are also “readily scalable.”295 While legacy TDM BDS is declining,296 carriers, including rate-of-return carriers that receive fixed support, are generally investing

286 EducationSuperHighway, 2018 State of the States Report at 8 (2018), https://s3-us-west-1.amazonaws.com/esh-sots-pdfs/2018%20State%20of%20the%20States.pdf.287 Don Frey, Ovum, Carrier Ethernet Equipment Forecast: 2017-22 – Highlights (Nov. 29, 2017), https://ovum.informa.com/resources/product-content/spt002-000012 (“Ethernet access and aggregation will grow 9%, driven by [passive optical network (PON) fiber] and access Ethernet products”).288 Petitioners’ Comments, Exhs. A-C.289 Id. 290 BDS Order, 32 FCC Rcd at 3485-88, paras. 57-62. 291 See Carol Wilson, LightReading, Analyst: Cable Gaining in Enterprise, but CenturyLink, Windstream Also Strong (June 18, 2018), https://www.lightreading.com/services/broadband-services/analyst-cable-gaining-in-enterprise-but-centurylink-windstream-also-strong/d/d-id/744034?; Davis, supra note 230; see also Jeff Baumgartner, LightReading, Cox Business Bulks Up With RapidScale Buy (Aug. 9, 2018), http://www.lightreading.com/cable/cable-business-services/cox-business-bulks-up-with-rapidscale-buy-/d/d-id/745314. 292 See, e.g., WTA Comments at 6 (arguing that rate-of-return carriers “lack the ability to impose prices and terms upon BDS customers that are much larger and that have the financial resources” to act as price-setters in negotiations).293 Id. 294 BDS Order, 32 FCC Rcd at 3499, para. 86 (“[a]s a matter of policy we prefer reliance on competition rather than regulation”).295 Id. at 3500, para. 88.296 Petitioners’ Comments at 14-15 (noting significant increases in demand for Ethernet services and declines in demand for TDM services); see also id., Exhs. A-C; TDS Telecom Comments at 1; Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment, WC Docket No. 17-84, Report and Order, Declaratory Ruling, and Further Notice of Proposed Rulemaking, 32 FCC Rcd 11128, 11160, para. 81 (2018).

https://s3-us-west-1.amazonaws.com/esh-sots-pdfs/2018%20State%20of%20the%20States.pdf

https://s3-us-west-1.amazonaws.com/esh-sots-pdfs/2018%20State%20of%20the%20States.pdf

https://ovum.informa.com/resources/product-content/spt002-000012

https://www.lightreading.com/services/broadband-services/analyst-cable-gaining-in-enterprise-but-centurylink-windstream-also-strong/d/d-id/744034?

https://www.lightreading.com/services/broadband-services/analyst-cable-gaining-in-enterprise-but-centurylink-windstream-also-strong/d/d-id/744034?

http://www.lightreading.com/cable/cable-business-services/cox-business-bulks-up-with-rapidscale-buy-/d/d-id/745314



41

aggressively to deploy high speed networks in their study areas.297 The record shows growing demand for packet-based and higher capacity TDM BDS consistent with the Commission’s findings in the BDS Order,298 and we find the record persuasive.

113. Removing ex ante pricing regulation for packet-based and higher capacity TDM services, will also encourage innovation. As the Commission has previously found, the potential unintended costs of regulation are far greater for new services.299 The Commission has concluded that ex ante pricing regulation for these services should not be imposed even with “insufficiently robust competition” because it would be difficult to administer such complex regulations.300 We are keenly aware of the risk that heavy-handed regulation could discourage competitive investment which would have long-term negative consequences on competitive deployment over time.301

114. These considerations also apply to the study areas of rate-of-return carriers that receive fixed support. Innovation does not stop at the borders of a price cap carrier’s study areas. The record shows that all providers are accelerating their deployment of next generation packet-based services in response to customer demand.302 We find that the sensitivity of new and growing services to imprecise regulation, particularly rate regulation, is a factor in areas served by rate-of-return carriers receiving fixed support as well as areas served by price cap carriers. For that reason, consistent with our decision in the BDS Order, we find that the costs and potential risks of ex ante pricing regulation for packet-based and higher capacity TDM business data services exceed the benefits and we therefore eliminate such regulation. This result provides regulatory parity between electing carriers and price cap carriers in their provision of packet-based and higher capacity TDM business data services which will benefit consumers.303

115. We eliminate ex ante pricing regulation on the provision of these services by electing carriers to hasten deployment of advanced services and because competition and the size of purchasers of these services is sufficient to protect consumers. We affirm, however, that the Commission retains authority under sections 201, 202, and 208 of the Act to ensure that packet-based and higher capacity TDM BDS rates and practices are just, reasonable, and not unreasonably discriminatory.304 The availability of the protections of sections 201 and 202, and the importance of the formal fast-track complaint process of section 208, will provide sufficient protection against unreasonable rates and practices in this increasingly competitive market.

297 Petitioners’ Comments at 14-15 (noting significant increases in demand for Ethernet services and declines in demand for TDM services); Sprint Comments at 5-6 (“[p]roviders are changing out TDM electronics for packet-based electronics”).298 See Petitioners’ Comments at 14-15; Sprint Comments at 5-6; Petitioners’ Comments, Exhs. A-C; TDS Telecom Comments at 8. Sprint proposes a complex proposal for packet-based and high speed services that would be difficult to administer and require A-CAM carriers to file with the Commission “the location of the offer, the customer that purchased it, and the price and unique terms and conditions of the offer.” Sprint Comments at 6-7. Such a proposal would be difficult for the Commission to administer, and complex and burdensome on A-CAM carriers, counter to the goals of this Order. 299 BDS Order, 32 FCC Rcd at 3517-19, paras. 125-29.300 Id. at 3499-3500, para. 87.301 Id. at 3499-3500, paras. 87-88; Petitioners’ Comments at 16.302 TDS Telecom Comments at 8 (arguing that TDM services are declining while packet-based/Ethernet services are increasing); Sprint Comments at 5 (“The industry is rapidly transforming from utilizing TDM BDS services to packet-based BDS services . . . .”); Petitioners’ Comments at 14. 303 Rural counties are served by both price cap carriers and A-CAM carriers and neighboring carriers should have regulatory parity when the record supports it. See TDS Telecom Comments at 8.304 47 U.S.C. §§ 201, 202, 208.


42

E. Implementation Issues

116. We take a series of additional steps to ensure electing carriers will be able fully to implement the BDS regulatory framework we adopt today, including adopting deadlines for implementing incentive regulation, forbearing from cost assignment and jurisdictional separations rules, forbearing from section 54.1305 reporting requirements, forbearing from section 203 tariffing requirements, allowing electing carriers to elect to use GAAP accounting instead of Part 32 accounting, and adopting certain transitional timeframes to facilitate the detariffing of electing carriers’ packet-based and higher capacity TDM offerings.

1. Effective Date of Elections

117. We adopt the following requirements to implement voluntary incentive regulation for electing carriers. We adopt the proposal in the Notice to make incentive regulation for electing carriers effective as of July 1, 2019 and add a second election date option for carriers that will be effective July 1, 2020. We agree with Petitioners that a January 1, 2019 effective date would be the least burdensome for carriers because cost studies are performed on a calendar year basis and “would benefit customers and competition alike.”305 However, a January 1, 2019 effective date is not practicable because the rules adopted in this Order contain new or modified information collection requirements triggering Paperwork Reduction Act review by the Office of Management and Budget (OMB), a process which takes approximately five months to complete.306 A January 1, 2019 effective date would also provide insufficient time for electing carriers in the traffic-sensitive NECA pool to remove their BDS offerings from the pool.307 Our rules require that annual access charge tariff filings be filed with a scheduled effective date of July 1.308 As such, a July 1 effective date is consistent with current tariffing procedures and will simplify the implementation of the changes adopted in this Order.309

118. Similarly, we adopt July 1 as the effective date for any future election. July 1 is the most efficient effective date because allowing carriers accepting future offers of A-CAM support to set their initial rates on another date would add cost and complexity to the process. Petitioners suggest using a January 1 effective date310 but doing so would require an electing carrier to make an additional tariff filing beyond the required July 1 annual filing. NECA, and the Commission, would have to undertake their associated review of the tariff, and NECA would be required to conduct its mid-year cost studies for the remaining pool members, calculate support for existing members, reband, and undertake other steps it would not do otherwise. Additionally, a January 1 effective date would be based on the previous year’s cost study. Relying on year-old data would undermine the validity of the tariff filings. It is possible that an electing carrier could prepare a cost study for only a portion of the current year and multiply the results

305 Petitioners’ Comments at 24; Letter from Michael J. Jacobs, Vice President, ITTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 17-144 (Jan. 9, 2018) (ITTA Jan. 9 Ex Parte) (“stressing the importance of the rules to be adopted in this proceeding becoming effective by the end of 2018, so as to avoid model-based rate-of-return carriers having to perform highly resource-intensive cost studies for 2019”) (citing Joint Petition at 3). 306 See Notice at 26, para. 67. The Commission invited the general public and OMB to comment on the information collection requirements contained in the Notice pursuant to the PRA. Notice at 26, para. 67. This Order modifies the collection contained in the Notice. OMB has until 60 days after Federal Register publication, to approve, instruct the agency to make a substantive or material change to, or disapprove, the collection of information contained in the final rule. See 44 U.S.C. § 3507(d)(4)(D); 5 CFR § 1320.11(h). Thus, the information collection may not become effective until 60 days after publication of this Order in the Federal Register. See 44 U.S.C. § 3507(d)(4)(D); 5 CFR § 1320.11(h). 307 See 47 CFR § 69.3. See also NECA Oct. 17 Ex Parte at 1.308 See 47 CFR §§ 69.3(a), 51.705, 51.907, 51.909.309 Notice at 26, para. 18.310 See Petitioners’ Comments at 24 (“The Commission should permit model-based carriers to elect the new BDS regulatory paradigm as of January 1, 2019, or any July 1 thereafter.”).


43

of the study to estimate a year’s data, but that approach creates additional burdens for carriers, complicates NECA’s implementation, and would still not represent a fully accurate picture of the carrier’s costs and demand. When considered together, we find that using July 1 as a deadline for setting initial rates in any future A-CAM offer is the most efficient and feasible approach.

119. Electing carriers currently in the NECA pool are required to notify NECA by March 1, 2019 that they will not participate in the upcoming NECA traffic-sensitive tariff for their BDS offerings consistent with section 69.3 of our rules.311 Similarly, NECA pool carriers that elect to convert to incentive regulation effective July 1, 2020, must notify NECA that they will not participate in the NECA traffic-sensitive pool for BDS offerings by March 1, 2020.312 NECA pool carriers that accept future offers of A-CAM support and elect the incentive regulation framework we adopt today or otherwise transition away from legacy support mechanisms must notify NECA by March 1 of their election year consistent with section 69.3. The Commission proposed requiring electing carriers to provide the Bureau with 120 days’ notice of their election to facilitate implementation of the revised tariffs but we now agree with Petitioners that opposed granting so much advanced notice.313 Accordingly, we require electing carriers electing to convert to incentive regulation effective July 1, 2019 to provide the Bureau with notice of their election by May 1, 2019.314 Carriers that elect our second incentive regulation option date, effective July 1, 2020, must notify the Bureau by May 1, 2020. Carriers that accept future offers of A-CAM support and carriers that otherwise transition away from legacy support mechanisms must provide notice of their election or transition to the Bureau by May 1 of the year of election or transition.315 Electing carriers that choose to update their separations category relationships pursuant to this Order shall include information to that effect in these notices to NECA and the Bureau.

2. Implementing Forbearance

120. As part of implementing our new regulatory framework for electing carriers’ BDS, we grant forbearance from certain existing Commission rules and statutory requirements, including our tariffing obligations for electing carriers’ packet-based and higher capacity (i.e., above a DS3 bandwidth level) TDM business data services and lower capacity TDM end user channel termination services in study areas deemed competitive; our Cost Assignment Rules; and our section 54.1305 reporting requirements, for electing carriers’ lower capacity (i.e., at or below a DS3 bandwidth level) TDM transport and end user channel termination services. Forbearance will be effective July 1, 2019 for carriers electing incentive regulation of their business data services as of July 1, 2019, and July 1, 2020 for carrier’s electing incentive regulation as of July 1, 2020.316 Section 10 of the Act requires that the Commission forbear from applying any provision of the Act, or any of the Commission’s regulations, if the Commission determines that: (1) enforcement of the provision or regulation is not necessary to ensure that a telecommunications carrier’s “charges, practices, classifications or regulations” are “just and reasonable and are not unjustly or unreasonably discriminatory,”317 (2) enforcement of the provision or regulation is “not necessary for the protection of consumers,”318 and (3) forbearance is consistent with the

311 See 47 CFR § 69.3(e)(6); see also id. § 69.3(i)(1); Letter from Jeffrey E. Dupree, NECA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 17-144 et al., at 1 (filed October 17, 2018) (NECA Oct. 17 Ex Parte). 312 Id. See also ITTA Oct. 16 Ex Parte at 2.313 See Notice, Appx. A § 61.50(b); Petitioners’ Comments at 24.314 See Petitioners’ Comments at 24. 315 See id.316 Such forbearance will likewise be effective as of the effective date of other carriers’ election of incentive regulation for their business data services.317 47 U.S.C. § 160(a)(1).318 Id. § 160(a)(2).


44

public interest.319 In making the public interest determination, the Commission must also consider, pursuant to section 10(b), “whether forbearance from enforcing the provision or regulation will promote competitive market conditions.”320 We find that granting forbearance in these instances will meet the statutory forbearance requirements and will facilitate electing carriers’ transition to incentive regulation, putting them on a footing similar to that of price cap carriers in their provision of BDS.

a. Forbearance from Tariffing Requirements for Packet-Based and Higher Capacity TDM Services and Lower Capacity TDM End User Channel Terminations in Study Areas Deemed Competitive

121. In order to effectuate our light-touch regulatory framework for packet-based and higher capacity TDM business data services above the DS3 bandwidth level, we grant forbearance, pursuant to section 10 of the Act, from section 203 tariffing requirements for these services offered by electing carriers. In addition, we grant forbearance for lower capacity TDM end user channel terminations offered in electing carriers’ study areas deemed competitive by the competitive market test. Forbearance from section 203 tariffing obligations is warranted under section 10 of the Act, is consistent with our finding that electing carriers lack market power in packet-based and higher capacity TDM business data services, and end user channel terminations in study areas deemed competitive by the competitive market test, and will enhance competition and deployment of these next generation services.

122. Forbearance from section 203 tariffing requirements for packet-based and higher capacity TDM BDS offerings above the DS3 bandwidth level, and for lower capacity TDM end user channel terminations in study areas deemed competitive by the competitive market test, satisfies all three prongs of the forbearance analysis. First, pursuant to section 10(a)(1), we conclude in the context of growing demand for high speed services detariffing these services will promote competitive market conditions, which will result in lower prices and better services, thus ensuring that electing carriers’ relevant charges, practices, classifications, and regulations are just and reasonable and not unreasonably discriminatory.321 Similarly, the existence of demonstrated competition for end user channel terminations in markets deemed competitive will restrain anticompetitive behavior, lower prices, increase innovation, and protect consumers from charges, practices, classifications, and regulations that are not just and reasonable and unreasonably discriminatory. Competition will serve to limit electing carriers’ behavior. Absent forbearance, as commenters argue, Commission regulation could have the inverse effect and harm competition and network deployment.

123. We also conclude that, pursuant to section 10(a)(2), enforcement of our tariffing requirements for these services is “not necessary for the protection of consumers.”322 Indeed by encouraging competition, granting forbearance from tariffing of these services will benefit consumers by increasing deployment and lowering cost. Competition among carriers and the roll-out of next generation packet-based and higher capacity TDM circuit-based BDS will lower prices and provide new services. In study areas deemed competitive, competition will also protect consumers. The Commission has previously found that tariffs were originally required to protect consumers but they are unnecessary if a provider faces competitive pressures.323 If an electing carrier harms a consumer the consumer can switch to other competitors present in the study area. This threat protects consumers. Of course, in the event that there is risk of consumer harm, sections 201, 202, and 208 remain applicable to enforce the Commission’s rules and protect consumers’ welfare. Based on competition in the market and our statutory mandate as a backstop, we find that section 203 is not necessary to protect consumers in electing carriers’ packet-based and higher capacity TDM markets, and for lower capacity TDM end user channel

319 Id. § 160(a)(3).320 Id. § 160(b).321 Id. § 160(a)(1).322 Id. § 160(a)(2).323 AT&T Forbearance Order, 22 FCC Rcd at 18721, para. 30 n.124.


45

termination in study areas deemed competitive by the electing carriers’ competitive market test.

124. Third, we conclude that forbearance from these statutory and regulatory requirements is in the public interest.324 Forbearance from the tariffing requirement for these packet-based and higher capacity TDM services and for lower capacity TDM end user channel terminations in markets deemed competitive will promote competition, reduce compliance costs, increase investment and innovation, and facilitate the technology transitions. We therefore find that application of section 203 is not necessary under sections 10(a)(1) and 10(a)(2), and is in the public interest, consistent with sections 10(a)(3) and 10(b).

b. Cost Assignment Rules Forbearance

125. In light of our decision to relieve electing carriers of the obligation to conduct cost studies, we grant electing carriers forbearance, pursuant to section 10 of the Act, from the Commission’s Cost Assignment Rules for their BDS services, although we grant forbearance for their lower capacity (i.e., at or below a DS3 bandwidth level) TDM transport and end user channel termination services after they have set initial rates for those offerings. Additionally, electing carriers that participate in the NECA pool must conduct cost studies for the calendar year prior to their election and the first half of the year of their election to comply with their pool settlement requirements.

126. Background. The Cost Assignment Rules generally require carriers to assign costs to build and maintain the network and revenues from services provided to specific categories. 325 Categories include nonregulated or regulated service, the intrastate or interstate jurisdiction, and specific access services, such as local switching or common line.326 The Cost Assignment Rules also govern the accounting treatment of transactions between a carrier and its affiliate, such as the sale or transfer of assets between regulated and nonregulated affiliates.327 In addition, the rules include certain reporting requirements, which depend on the availability of data produced by the Cost Assignment Rules.328

127. As part of the regulatory accounting process, carriers first record their costs, including investments and expenses, into various accounts in accordance with the Uniform System of Accounts (USOA) prescribed by Part 32 of the Commission’s rules.329 Next, using the Cost Assignment Rules in Part 64, carriers directly assign, or allocate if direct assignment is not possible, the costs and revenues associated with their regulated and nonregulated activities.330 After costs and revenues are divided between those that are regulated and nonregulated, interstate and intrastate costs and revenues are

324 47 U.S.C. § 160(a)(3).325 The Commission defined the term “Cost Assignment Rules” to include various rules from Parts 32, 63, 64, 65, and 69 of the Commission’s rules and section 220(a)(2) of the Act that “generally require carriers to assign costs to build and maintain the network and revenues from services provided to specific categories.” Petition of USTelecom for Forbearance Pursuant to 47 U.S.C. § 160(c) from Enforcement of Certain Legacy Telecommunications Regulations et al., WC Docket No. 12-61 et al., Memorandum Opinion and Order and Report and Order and Further Notice of Proposed Rulemaking and Second Further Notice of Proposed Rulemaking, 28 FCC Rcd 7628, 7646, para. 31 (2013) (USTelecom Forbearance Order), aff’d sub nom Verizon v. FCC, 770 F.3d 961 (D.C. Cir. 2013). The rules included in this term are listed in Appendix A of the USTelecom Forbearance Order. See id. at 7747-48, Appx. A. 326 See 47 CFR Parts 36, 64, 69.327 See 47 CFR § 32.27.328 These reports include the ARMIS 43-04, the Rate-of-Return Monitoring Report (FCC Form 492), the Reg/Non-Reg Forecast Report (FCC Form 495A) and the Reg/Non-Reg Actual Usage Report (FCC Form 495B). See AT&T Cost Assignment Forbearance Order, 23 FCC Rcd at 7307-08, para. 12. 329 See 47 CFR Part 32.330 See 47 CFR §§ 64.901-905.


46

separated as provided in Part 36.331 Federal and state regulatory jurisdictions apply their own ratemaking processes to the amounts assigned to each jurisdiction.332 Finally, the access charge rules in Part 69 require carriers to separate regulated interstate costs into interexchange costs and access costs, and then apportion the latter among access categories or elements.333

128. The Commission adopted the Cost Assignment Rules to help ensure that carriers charge just and reasonable rates for the services they provide. The Commission adopted the Cost Assignment Rules prior to 1991 when all incumbent LECs were subject to rate-of-return regulation, so that it could set rates that allowed carriers to recover their costs and earn a specific return on their regulated investment. Subsequently, the Commission moved away from rate-of-return regulation for the larger incumbent LECs.334 In its place, it adopted price cap regulation, a form of incentive regulation that seeks to “harness the profit-making incentives common to all businesses to produce a set of outcomes that advance the public interest goals of just, reasonable, and nondiscriminatory rates, as well as a communications system that offers innovative, high quality services.”335

129. In 2008, the Commission granted AT&T conditional forbearance from the Cost Assignment Rules.336 The Commission conditioned the forbearance on, among other things, requiring AT&T to retain Part 32 Uniform System of Accounts data and submit a compliance plan describing in detail how it would fulfill its statutory and regulatory requirements.337 The Commission granted similar conditional forbearance from the Cost Assignment Rules to Verizon and Qwest.338 Subsequently, Qwest, Verizon, and AT&T obtained conditional forbearance from certain financial reporting requirements that relied on the Cost Assignment Rules.339 In 2013, the Commission extended the conditional forbearance

331 See 47 CFR Part 36.332 See Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, WC Docket Nos. 05-271 et al., CC Docket Nos. 02-33 et al., Report and Order and Notice of Proposed Rulemaking, 20 FCC Rcd 14853, 14925, para. 129 (2005) (Wireline Broadband Order), aff’d, Time Warner Telecom v. FCC, 507 F.3d 205 (3rd Cir. 2007).333 See 47 CFR § 69.4(b) (including the following elements: common line, local switching, information, tandem-switched transport, direct-trunked transport, special access, line information database, entrance facilities, and recovery of contributions to universal service support mechanisms by incumbent LECs). 334 Price Cap Order, 5 FCC Rcd at 6787, para. 2.335 Id.336 See generally AT&T Cost Assignment Forbearance Order. 337 See id. at 7314, para. 21; id. at 7319-20, para. 31.338 Service Quality Customer Satisfaction, Infrastructure and Operating Data Gathering, Petition of AT&T Inc. for Forbearance Under 47 U.S.C. § 160(c) from Enforcement of Certain of the Commission’s ARMIS Reporting Requirements et. al., WC Docket Nos. 08-190, 07-139, 07-204, 07-273, 07-21, Memorandum Opinion and Order and Notice of Proposed Rulemaking, 23 FCC Rcd 13647 (ARMIS Forbearance Order) pet. for recon. pending, pet. for review pending, NASUCA v. FCC, Case No. 08-1353 (D.C. Cir. filed Nov. 4, 2008). In this Order, the Commission granted Qwest and Verizon the same conditional forbearance from the Cost Assignment Rules it granted to AT&T. However, in addition, the Commission conditioned relief on requiring the carriers to describe in their compliance plans how they will maintain and provide accounting data in study areas where the carriers receive rural high-cost universal service support. See id. at 13663, para. 30. The Order also granted conditional forbearance from ARMIS Reports 43-05, 43-06, 43-07 and 43-08 for all carriers (not just Verizon and Qwest). See id. at 13652, para. 7.339 See, e.g., Petition of Qwest Corporation for Forbearance from Enforcement of the Commission’s ARMIS and 492A Reporting Requirements Pursuant to 47 U.S.C. § 160(c), et al., WC Docket Nos. 07-204, 07-273, Memorandum Opinion and Order, 23 FCC Rcd 18483, 18484, para 1, 18487, para. 8 (2008) (Qwest ARMIS Forbearance Order). The reports, for which conditional forbearance was granted, are ARMIS Reports 43-01, 43-02, and 43-03 (collectively, the ARMIS Financial Reports). We discuss the importance of the pole attachment data in Section III.E.3 infra.


47

granted the three carriers to all price cap carriers.340

130. In the Part 32 Order, the Commission terminated the conditions that the Commission placed on a variety of carriers granted forbearance from our Cost Assignment Rules.341 The Commission noted that forbearance was expressly premised on the continued availability of Part 32 accounting data and the filing of compliance plans consistent with that condition.342 The Commission determined that continuing to maintain these costly requirements on the speculation that at some point the Commission might do something with them failed any cost-benefit analysis.343

131. Discussion. We find that applying the Cost Assignment Rules to electing carriers is no longer necessary to ensure that charges and practices are just, reasonable, and not unjustly or unreasonably discriminatory; to protect consumers; or to protect the public interest.344 Much of the reasoning in the Commission’s earlier decisions to grant price cap LECs forbearance from the Cost Assignment Rules applies equally to rate-of-return carriers receiving fixed support that elect incentive regulation.345 With respect to ensuring charges, practices, classifications, and regulations are just and reasonable and not unjustly or unreasonably discriminatory, as discussed above, the Cost Assignment Rules were developed when the incumbent LECs’ interstate rates and many of their intrastate rates were set under rate-based, cost-of-service regulation.346 Because the incentive regulation we adopt severs for BDS the direct link between regulated costs and prices just as price cap regulation did, a carrier is not able automatically to recoup misallocated nonregulated costs by raising BDS rates, thus reducing incentives to shift nonregulated costs to regulated services.347 To the extent incentives remain, we find our positive experience with the waivers of the all-or-nothing rule provides confidence that the additional costs of

340 Petition of USTelecom for Forbearance, et al., Memorandum Opinion and Order and Report and Order and Further Notice of Proposed Rulemaking and Second Further Notice of Proposed Rulemaking, WC Dockets Nos. 12-61 et al., CC Docket Nos. 02-39 et al., 28 FCC Rcd 7627 (2013) (US Telecom Forbearance Order). 341 Comprehensive Review of the Part 32 Uniform System of Accounts; Jurisdictional Separations and Referral to the Federal-State Joint Board, Report and Order, WC Docket No. 14-130; CC Docket No. 80-286, 32 FCC Rcd 1735, 1748, para. 44 (2017) (Part 32 Report and Order).342 See, e.g., AT&T Cost Assignment Forbearance Order, 23 FCC Rcd at 7314, para. 21 (“USOA account data will continue to be maintained and available to the Commission on request”).343 Part 32 Report and Order, 32 FCC Rcd at 1749, para. 44. 344 Section 220(i) of the Communication Act of 1934, as amended, provides that “(t)he Commission, before prescribing any requirements as to accounts, records and memoranda, shall notify each State commission having jurisdiction with respect to any carrier involved and shall give reasonable opportunity to each such commission to present its views, and receive and consider such views and recommendations.” 47 U.S.C. § 220(i). On August 15, 2018, the Bureau provided each State commission with additional notice of the Notice and invited them to present their views and recommendations. Letter from Pamela Arluk, Chief, Pricing Policy Division, Wireline Competition Bureau, FCC to State Commissions, WC Docket No. 17-144 (dated Aug. 15, 2018). 345 Joint Petition at 33; see generally AT&T Cost Assignment Forbearance Order, 23 FCC Rcd at 7302.346 AT&T Cost Assignment Forbearance Order, 23 FCC Rcd at 7311, para. 17.347 See Wireline Broadband Order, 20 FCC Rcd at 14925-26, para. 133. We note that the fact that price cap rates cannot be raised automatically does not mean that the relationship between costs and prices is eliminated. While the direct link between costs and price cap carriers’ access rates no longer exists, costs still have an impact on other rates price cap carriers charge. See also Special Access Rates for Price Cap Local Exchange Carriers; AT&T Petition for Rulemaking to Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services, WC Docket No. 05-25, RM-10593, Order and Notice of Proposed Rulemaking, 20 FCC Rcd 1994, 1999, para. 12 (2005) (2005 Special Access NPRM) (“Although price cap regulation diminished the direct link between changes in allocated accounting costs and change in prices, it did not sever the connection between accounting costs and prices entirely.”).


48

maintaining the Cost Assignment Rules outweighs any possible benefit of maintaining them.348 There is no reason to impose on electing carriers cost assignment requirements that were “designed to parallel the level of detail in the cost-of-service calculations that LECs performed to develop their rates for interstate access services.”349 Moreover, if the need arises for cost data from electing carriers, we find there are less costly ways to meet that need.

132. With respect to the second prong of the forbearance test, protecting consumers, the Commission adopted the Cost Assignment Rules in part to help protect consumers from improper cross-subsidization of competitive services provided on an integrated basis with noncompetitive services by dominant providers with individual market power.350 Because the rates for regulated services and the determination of the level of universal service support are no longer tied to accounting costs, electing carriers will have no incentive to shift costs between regulated and nonregulated services, or to services receiving universal service support, thus the consumer protection issues that animate the Cost Assignment Rules are not relevant for electing carriers.

133. We also find that forbearing from the Cost Assignment Rules for electing carriers is in the public interest. Because neither rates nor universal service support will be cost-based for electing carriers, relieving electing carriers of the expense of compliance with the Cost Assignment Rules will allow electing carriers to offer more competitive rates and more innovative service, thus furthering the public interest.

134. Finally, section 10(b) requires us to consider, as part of our analysis of the public interest prong, whether forbearance will promote competitive market conditions. We agree with Petitioners, TDS Telecom and other commenters that contend that forbearance will enhance competition.351 Eliminating unnecessary regulation will generally reduce electing carriers’ costs and, in turn, benefit consumers through lower rates and/or more vibrant competitive offerings. Because other providers of similar services are not subject to the rules, it also promotes competition by providing a more level playing field. Moreover, as noted above, we find that sufficient protections remain in place to prevent anti-competitive cross-subsidization.

135. We note that there still may be instances in which an electing carrier seeks some other type of relief from the Commission that requires supporting cost assignment data. In such instances, the burden is on the carrier to retain data sufficient to make the required showing to the Commission in support of such a carrier-initiated request.

136. As part of our forbearance from the Cost Assignment Rules, we also forbear from the NECA data reporting requirement in section 54.1305 of our rules and, by extension, from the related requirement to update information shared with NECA.352 Under the Commission’s rules, incumbent LECs are required to report unseparated loop cost data to NECA annually.353 Price cap carriers and their

348 Petition of Virgin Islands Telephone Corporation, for Election of Price Cap Regulation and Limited Waiver of Pricing and Universal Service Rules; China Telephone Company, FairPoint Vermont, Inc., Maine Telephone Company, Northland Telephone Company of Maine, Inc., Sidney Telephone Company, and Standish Telephone Company Petition for Conversion to Price Cap Regulation and for Limited Waiver Relief; Windstream Petition for Limited Waiver Relief, Order, 25 FCC Rcd 4824, 4836, para. 25 (WCB 2010). 349 See AT&T Cost Assignment Forbearance Order, 23 FCC Rcd at 7311, para. 17. 350 See, e.g., Wireline Broadband Order, 20 FCC Rcd at 14925, para. 131 (explaining that the purpose of the cost allocation rules “was to ensure that telephone ratepayers would continue to receive reasonable protections against improper cross-subsidization in the event the BOCs provided enhanced service on an integrated basis, rather than through separate subsidiaries”).351 Petitioners’ Comments at 15-16; AT&T Comments at 15.352 47 CFR §§ 54.1305, 1306.353 See 47 CFR § 54.1305.


49

affiliates354 have been exempt from this obligation since the Commission adopted the USF/ICC Transformation Order 355 and various price cap cost assignment forbearance orders.356 This reporting requirement depends on the availability of data produced by the Cost Assignment Rules. As part of the forbearance adopted in this Order, we cease to require data that would otherwise be reported as part of a cost study. Retaining this obligation is thus inconsistent with our grant of forbearance and is inconsistent with past price cap carrier forbearance grants.357 Retaining this obligation would also eliminate one of the core incentives for rate-of-return carriers to elect incentive regulation—cost savings from the elimination of the obligation to undertake cost studies.

137. Granting forbearance from NECA reporting requirements satisfies all three prongs of the forbearance analysis. The NECA data collection requirement is not necessary to ensure that carrier charges and practices are just and reasonable, as evidenced by the fact that price cap carriers have been operating without NECA reporting for nearly six years without issue. While no longer including electing carriers’ data in the calculation of the national average cost per loop will affect that calculation, we do not think that any impact it may have outweighs the benefits of removing these reporting obligations. Since the very goal of incentive regulation is to disconnect cost and rates to promote competition in the marketplace, reporting cost data to NECA is also unnecessary to protect consumers. Additionally, because forbearance from enforcing these rules is necessary to obtain the benefit of reducing unnecessary regulatory compliance costs this Order seeks, forbearance is consistent with the public interest. Retaining the data collection and reporting requirements of sections 54.1305 and 54.1306 would force electing carriers to continue to perform annual cost studies and would thus eliminate one of the chief sources of cost savings of this Order. Forbearing from these requirements will promote competition by allowing these resources to be redirected to increase network investment and to accelerate the technology transition from legacy circuit-based services to packet-based services such as Ethernet.

3. GAAP Accounting

138. We allow electing carriers the option of using generally accepted accounting principles (GAAP) for keeping their accounts. The only commenters that oppose allowing electing carriers to use GAAP accounting incorrectly argue that for electing carriers Part 32, cost studies and other protections are necessary because “these electing carriers would continue to have certain of their interstate services under rate-of-return.”358 In fact, as explained by Petitioners, all of the interstate telecommunications services offered by electing carriers will either be (1) subject to incentive regulation, (2) not subject to ex ante pricing regulation, or (3) capped and transitioning downward by the terms of the rate-of-return intercarrier compensation rules.359 Thus, there is no significant reason to continue to maintain burdensome Part 32 accounting for electing carriers.360

139. The Commission recently revised its Part 32 accounting rules to allow price cap LECs to elect to use GAAP in recording and reporting their financial data, subject to two targeted accounting requirements.361 We subject electing carriers that choose to use GAAP accounting to the same data provisioning requirements as price cap carriers, including the requirements relating to the calculation of pole attachment rates. Electing carriers may either (a) calculate an Implementation Rate Difference between the attachment rates calculated by the carrier under the Uniform System of Accounts (USOA)

354 47 CFR § 54.1301.355 USF/ICC Transformation Order, 26 FCC Rcd at 18161, Appx. A, para. 18.356 See, e.g., USTelecom Forbearance Order, 28 FCC Rcd at 7646, para. 31. 357 Id. 358 AT&T Reply Comments at 5.359 See Petitioners’ Comments at 13-14; TDS Telecom Comments at 7.360 See supra n.346.361 Part 32 Accounting Order, 32 FCC Rcd at 1739, para. 12.


50

and under GAAP as of the last full year preceding the carrier’s initial opting-out of Part 32 USOA accounting requirements; or (b) comply with GAAP accounting for all purposes other than those associated with setting pole attachment rates while continuing to use the Part 32 accounts and procedures necessary to establish and evaluate pole attachment rates. Electing carriers must adjust their annually computed GAAP-based rates by the Implementation Rate Difference for a period of 12 years after the election.362 This will free electing carriers from having to maintain two sets of books: one for financial reporting purposes consistent with GAAP and one for regulatory reporting purposes consistent with the accounting requirements of Part 32.

4. Transitions

140. Consistent with our actions in the BDS Order, our detariffing actions in this Order for electing carriers’ study areas will be mandatory after a transition that will provide electing carriers sufficient time to adapt their business data services operations to a detariffing regime.

141. The transition period will begin on the date incentive regulation becomes effective for electing carriers, either July 1, 2019 or July 1, 2020, and will end thirty-six (36) months thereafter, a period that we find sufficient for electing carriers to adapt to a detariffing regime. In addition, for six (6) months following the date incentive regulation becomes effective, we require electing carriers to freeze the tariffed rates for their business data services that are no longer subject to ex ante pricing regulation, including lower speed TDM end user channel terminations in newly deregulated study areas, provided those services remain tariffed. These transition mechanisms will ensure that small businesses and other purchasers have time to adjust to the new regulatory framework we adopt.363

142. Similarly, carriers electing incentive regulation in connection with a subsequent offer of A-CAM support, or carriers that the Commission otherwise transitions away from legacy support mechanisms must detariff the relevant business data services within thirty-six (36) months of the date on which their incentive-based rates take effect or their transition away from legacy support mechanisms becomes effective. Further, for six (6) months following such dates, such carriers will be required to freeze their tariffed rates for BDS that are no longer subject to ex ante pricing regulation, provided those rates remain tariffed.

143. Tariffing for these services will be permissive during the transition—we will accept new tariffs and revisions to existing tariffs for the affected services during this time period. Electing carriers may also detariff during the transition. Apart from the rate freeze noted above, carriers will no longer be required to comply with ex ante pricing regulation for these services. Once the rules adopted in this Order are effective, carriers that wish to continue filing tariffs under the permissive detariffing regime are free to modify such tariffs to reflect the new regulatory structure outlined in this Order for the affected services. This will allow carriers to be more competitive and introduce new business data services as they adapt to detariffing.

144. Electing carriers may remove the relevant portions of their tariffs for the affected services at any time during the transition, and the rate freeze does not apply to services that are no longer tariffed. Electing carriers may not file or maintain any interstate tariffs for affected business data services once the transition ends. This will prevent electing carriers from obtaining “deemed lawful” status for tariff filings that are not accompanied by cost support and invoking the filed-rate doctrine in contractual disputes with customers.364 Business data service providers will also be prevented from picking and choosing when they are able to invoke the protections of tariffs.365

145. We do not intend our actions to disturb existing contractual or other long-term

362 See id. at 1746, para. 36.363 See BDS Order, 32 FCC Rcd at 3534, para. 167.364 AT&T Forbearance Order, 22 FCC Rcd at 18729, para. 42; Detariffing Order, 11 FCC Rcd at 20765, para. 60.365 See, e.g., AT&T Forbearance Order, 22 FCC Rcd at 18729, para. 42.


51

arrangements—a contract tariff remains a contract even if it is no longer tariffed. As we stated in the BDS Order, contract tariffs, term and volume discount plans, and individual circuit plans do not become void upon detariffing.366 All carriers are to act in good faith to develop solutions to ensure rates remain just and reasonable.367

IV. OTHER RULE CHANGES

146. In addition to adopting the proposal in the Notice to provide an option for rate-of-return carriers receiving fixed universal service support based on the A-CAM to transition their BDS to incentive regulation, we adopt the rules changes found in Appendix A. These rule changes include changes arising from this Order as well as corrections to inaccuracies in our current rules. Thus, we change (1) the cross reference to section 61.3(aa) in section 51.903(g) to section 61.3(bb), (2) the cross reference to section 61.3(ee) in section 61.41(d) to section 61.3(ff), (3) the cross reference to section 61.3(x) in section 69.114 to section 61.3(ff), and (4) the cross reference to section 69.801(g) in section 69.805(a) to section 69.801(h). These cross references have been rendered inaccurate because of changes in the definitions contained in section 61.3.

V. SECOND FURTHER NOTICE OF PROPOSED RULEMAKING AND FURTHER NOTICE OF PROPOSED RULEMAKING

147. In light of the Eighth Circuit Court’s recent decision upholding the bulk of the Commission’s price cap BDS Order, but finding that the Commission provided insufficient notice of its decision to end ex ante pricing regulation of TDM transport services offered by price cap carriers,368 we now propose to eliminate ex ante pricing regulation of price cap incumbent LECs’ provision of TDM transport and other transport (i.e., non-end user channel termination) special access services369 and seek comment on this proposal. We also take this opportunity to seek comment on the circumstances under which we should eliminate ex ante pricing regulation of lower capacity TDM transport services (at or below a DS3) offered by those rate-of-return carriers that receive fixed high-cost universal service support and have elected the lighter touch regulatory framework provided for in the order accompanying this Second Further Notice and Further Notice.

366 See BDS Order, 32 FCC Rcd at 3533, para. 170.367 As we stated in the BDS Order, “there are a number of instances in which a contract tariff may reference a tariffed rate in order to calculate the contract rate for a particular service. In these circumstances, we believe there are a number of options for carriers to address this situation to continue to ensure the terms of the contract are upheld and rates continue to be just and reasonable.” BDS Order, 32 FCC Rcd at 3534, para. 170 n.450. For example, an electing carrier could publish the rates that would be used for the contract on its website, or in a published guidebook. The electing carrier and customer could also negotiate an addendum to the contract that would identify the actual rates for the particular services. Id.368 Citizens Telecomms. Co. of Minn., LLC v. FCC, 901 F.3d 991, 1004-06 (8th Cir. Aug. 28, 2018) (Citizens Telecomms. v. FCC); Business Data Services in an Internet Protocol Environment; Technology Transitions; Special Access for Price Cap Local Exchange Carriers; AT&T Corporation Petition for Rulemaking to Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services, WC Docket Nos. 16-143, 05-25, GN Docket No. 13-5, RM-10593, Report and Order, 32 FCC Rcd 3459 (2017) (BDS Order), remanded in part sub nom., Citizens Telecomms. Co. of Minn., LLC v. FCC, 901 F.3d 991 (8th Cir. Aug. 28, 2018).369 We use the terms “transport” and “TDM transport” to refer to interoffice facilities and channel terminations between an incumbent LEC’s serving wire center and an interexchange carrier (IXC), services covered by section 69.709(a)(4) of the Commission’s rules. It excludes the elements of that rule that cover switched access services, such as entrance facilities, dedicated transport facilities between the serving wire center and the tandem switching office, and direct-trunked transport. 47 CFR § 69.709(a)(4); see also BDS Order, 32 FCC Rcd at 3496, para. 79 n.258.


52

A. Eliminating Ex Ante Pricing Regulation of TDM Transport Services Provided by Price Cap Carriers

148. For the better part of the last two decades, in response to increasing competition for TDM transport in areas of the country served by price cap carriers, the Commission has consistently worked to modify and streamline regulation of such services. Most TDM transport offered by price cap carriers has been subject to some form of pricing flexibility as a result of the Commission’s 1999 Pricing Flexibility Order.370 In adopting the Pricing Flexibility Order, the Commission acknowledged that, because transport services encompass higher capacity middle-mile segments of the network, facility-based entry was more likely to occur for those services than for end user channel terminations, and therefore set lower thresholds for carriers to demonstrate competition and obtain pricing flexibility.371 Although the Commission suspended further grants of pricing flexibility in 2012, it did not revoke any pricing flexibility previously granted.372

149. In the BDS Order, the Commission evaluated the record before it and concluded that there was sufficient competition to justify nationwide pricing relief for TDM transport offered by price cap carriers.373 The record shows, for example, that some major urban areas have as many as 28 transport competitors374 while second-tier MSAs commonly have more than a dozen competitors.375 More broadly, the record shows that in 2013, 92.1% of buildings served with BDS demand in price cap territories were within a half mile of competitive fiber transport facilities.376 Further, the record shows that 89.6% of all price cap census blocks with BDS demand had at least one served building within a half mile of competitive fiber.377 Thus, the Commission found that “the vast majority” of locations featuring BDS demand had competitive fiber within close proximity.378 The Commission added that its data were conservative given the limits of the 2015 Collection, and that the data in that collection are from 2013, and therefore necessarily understate the level of current competition.379

150. On appeal, the Eighth Circuit Court largely affirmed the BDS Order, but found the

370 The Pricing Flexibility Order provided relief in two phases based on various triggers. Access Charge Reform et al., CC Docket No. 96-262 et al., Fifth Report and Order and Further Notice of Proposed Rulemaking, 14 FCC Rcd 14221, 14225, para. 4 (1999) (Pricing Flexibility Order), aff’d, WorldCom v. FCC, 238 F.3d 449 (D.C. Cir. 2001).371 See Pricing Flexibility Order, 14 FCC Rcd at 14279, para. 102 (“Entrance facilities, direct-trunked transport, channel mileage, and the flat-rated portion of tandem-switched transport all involve carrying traffic from one point of traffic concentration to another. Thus, entering the market for these services requires less investment per unit of traffic than is required, for example, for channel terminations between an end office and customer premises.”).372 See Special Access for Price Cap Local Exchange Carriers; AT&T Corp. Petition for Rulemaking to Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services, WC Docket No. 05-25, RM-10593, Report and Order, 27 FCC Rcd 10557, 10558, para. 1 (2012) (the Commission suspended further grants of pricing flexibility “in light of significant evidence that these rules, adopted in 1999, are not working as predicted, and . . . fail to accurately reflect competition in today’s special access markets.”).373 BDS Order, 32 FCC Rcd at 3501, para. 91.374 Id. at 3496-7, para. 79. 375 Id. 376 Id. at 3501, para. 91.377 Id.378 Id. at 3496, para. 79.379 See id. at 3466, para. 10; Business Data Services in an Internet Protocol Environment et al., WC Docket No. 16-143 et al., Tariff Investigation Order and Further Notice of Proposed Rulemaking, 31 FCC Rcd 4723, 4737-43, paras. 29-37, 39-43 (2016) (BDS FNPRM), agency’s request for voluntary remand granted sub nom., AT&T, Inc., et al. v. FCC, Nos. 16-1145, 16-1166, 16-1177 (D.C. Cir. Aug. 29, 2017) (in-depth discussion on 2015 Collection); see also FCC, Special Access Data Collection Overview, www.fcc.gov/general/special-access-data-collection-overview-0 (last visited Oct. 23, 2018).




53

Commission did not provide adequate notice on the narrow issue of ending ex ante pricing regulation of TDM transport services.380 The court vacated those portions of the BDS Order dealing with TDM transport and remanded them to the Commission for further action, which we initiate here.381

151. The current record includes “strong evidence of substantial competition” in price cap TDM transport markets.382 In addition to showing that there is “widespread deployment of competitive transport networks” in price cap areas, the record also indicates that transport services are “typically higher volume services . . . which can more easily justify competitive investment and deployment.”383

152. In light of the current record of substantial competition and competitive pressure on TDM transport services in price cap areas, we now propose to eliminate nationwide ex ante pricing regulation of price cap carriers’ TDM transport services and seek comment on our proposal. Specifically, we propose granting price cap carriers forbearance pursuant to section 10 of the Communications Act of 1934, as amended (the Act) from section 203 tariffing requirements for their TDM transport business data services and other transport special access service offerings.384 Consistent with the transition adopted in the BDS Order for packet-based and higher capacity TDM BDS, we propose permissive detariffing for price cap carriers’ TDM transport services for a transition period, followed thereafter by mandatory detariffing of these business data services. We propose to end the transition period for price cap carriers’ TDM transport services on the same date that the transition period mandated by the BDS Order for price cap carriers’ other BDS services is scheduled to end—August 1, 2020—to align these transition periods and simplify their administration. In addition, we propose, for six (6) months following the effective date of an order adopting final rules, to require price cap carriers to freeze the tariffed rates for their TDM transport services, as long as those services remain tariffed.385 We seek comment on these proposals.

153. We propose that during this transition, tariffing for these transport services will be permissive—the Commission will accept new tariffs and revisions to existing tariffs for the affected services. Apart from the rate freeze noted above, carriers will no longer be required to comply with price cap regulation for these services, and once the rules proposed in this Second Further Notice are effective, carriers that wish to continue filing tariffs under the permissive detariffing regime would be free to modify such tariffs to reflect the new regulatory structure outlined in this Second Further Notice for the affected services.386 We propose allowing price cap carriers to remove the relevant portions of their tariffs for the affected services at any time during the transition, and for the rate freeze to no longer apply to services that are not tariffed.387 We propose that once the transition ends, no price cap carrier may file

380 Citizens Telecomms. v. FCC, 901 F.3d at 1004.381 Id. at 1004, 1006.382 See BDS Order, 32 FCC Rcd at 3496, para. 79; id. at 3501, para. 91. 383 Id. at 3496, para. 79; id. at 3495, para. 77. 384 See 47 U.S.C. § 160. Under section 10(a), the Commission is required to forbear from any such provision or regulation if it determines that: (1) enforcement of the provision or regulation is not necessary to ensure the telecommunications carrier’s “charges, practices, classifications, or regulations” are “just and reasonable and are not unjustly or unreasonably discriminatory;” (2) enforcement of the provision or regulation is “not necessary for the protection of consumers;” and (3) forbearance is “consistent with the public interest.” In making this public interest determination, the Commission must also consider, pursuant to section 10(b), “whether forbearance from enforcing the provision or regulation will promote competitive market conditions.” Id.; see BDS Order, 32 FCC Rcd at 3529, para. 154.385 See BDS Order, 32 FCC Rcd at 3533, para. 167.386 Id. at 3533, para. 168. 387 Id. at 3533, para. 169.


54

or maintain any interstate tariffs for affected business data services.388 We seek comment on these proposals.

154. We also seek comment on our analysis of the TDM transport market for price cap carriers. To what extent does the Commission’s competitive analysis in the BDS Order continue to represent an accurate assessment of the competitive nature of the TDM transport market in price cap areas? Has the market for TDM transport in price cap areas changed materially since the Commission adopted the BDS Order? Is there evidence that competition for TDM transport has changed in these markets since the Commission last analyzed this market? Are there providers of TDM transport that were not identified by the 2015 Collection? How has this growth in competition impacted demand for TDM transport? In addition to the evidence the Commission previously considered in finding that there is sufficient competition to justify nationwide pricing relief for TDM transport offered by price cap carriers, there are indications that cable providers’ market share of lower speed business data services continues to grow significantly.389 As a competitor, cable operators self-provision all aspects of their BDS, including transport functionality, and rarely, if ever, collocate at incumbent LEC end offices.390 This increased competition from cable operators is in addition to competition from other providers. Given that cable competition does not typically rely on the TDM transport provided by incumbent local exchange carriers because they have built out their own networks,391 how should we factor such competition into a comprehensive analysis of TDM transport competition in price cap areas? Additionally, to what extent has the increase in demand for packet-based business data services and the resulting decrease in demand for TDM services affected competition for TDM transport?

155. We seek comment on whether we should consider any alternatives to removing ex ante pricing regulation for TDM transport offered by price cap carriers to better align our regulation with the dynamic and evolving nature of the business data services market. Should we, for example, adopt a competitive market test to measure the competitiveness of TDM transport offerings in areas served by price cap carriers? If so, how should such a test be structured? Should such a test assess competition using the counties served by price cap carriers as the relevant geographic market, as we do with the competitive market test for price cap carriers’ lower capacity TDM end user channel terminations? Alternatively, should we use the same competitive market test for TDM transport offerings of price cap carriers as we do for lower capacity TDM end user channel terminations offered by price cap carriers?392 If we adopt a competitive market test for TDM transport offered by price cap carriers, how should we

388 Id.389 See, e.g., Matt Davis, Independence Research LLC, SMB & National Enterprise Market Trends Report: U.S. Telecom Market Sizing and Revenues Share – YE 2017 (abridged) (May 2018), https://independenceresearch.com/research (“from 2016 to 2017, cable increased . . . its small to medium size business (or SMB) market share from 40 to 44 percent”); Jeff Baumgartner, LightReading, Cox Business Bulks Up With RapidScale Buy (Aug. 9, 2018), http://www.lightreading.com/cable/cable-business-services/cox-business-bulks-up-with-rapidscale-buy-/d/d-id/745314 (reporting that the top seven U.S. cable operators generated more than $16 billion in revenues from business data services for 2017, and are forecasted to approach $18 billion in 2018 and $20 billion in 2019); Sean Buckley, FierceTelecom, Comcast says it's starting to ramp up medium, enterprise customer business opportunities (Jan 24, 2018), https://www.fiercetelecom.com/telecom/comcast-says-it-s-starting-to-ramp-medium-enterprise-customer-business-opportunities. 390 Cable operators, like some other competitive providers, routinely bypass incumbent LEC facilities. BDS Order, 32 FCC Rcd at 3497, para. 81 (“While business data services providers may choose to purchase transport . . . many have deployed transport instead of buying the service.”).391 NCTA—The Internet & Television Association, The Benefits that Americans Reap From Cable’s $275 Billion Investment (Feb. 23, 2018), https://www.ncta.com/whats-new/the-benefits-that-americans-reap-cables-275-billion-investment.392 BDS Order, 32 FCC Rcd at 3499, para. 86.

https://independenceresearch.com/research



https://www.fiercetelecom.com/telecom/comcast-says-it-s-starting-to-ramp-medium-enterprise-customer-business-opportunities

https://www.fiercetelecom.com/telecom/comcast-says-it-s-starting-to-ramp-medium-enterprise-customer-business-opportunities

https://www.ncta.com/whats-new/the-benefits-that-americans-reap-cables-275-billion-investment

https://www.ncta.com/whats-new/the-benefits-that-americans-reap-cables-275-billion-investment


55

implement the results of such a test? Should we adopt similar transition provisions as those we adopted for the competitive market test for end user channel terminations in the BDS Order?393

156. We invite interested parties to submit any additional data or information regarding the state of competition for TDM transport services in price cap areas. Are there more current data available on the state of competition for TDM transport services that could enhance our analysis of this market? Are there any other ways of measuring or estimating competition for TDM transport in areas served by price cap carriers that have not already been used by the Commission? Are there other types of data that could represent a proxy for competition in the TDM transport market in areas served by price cap carriers? While the data in the 2015 Collection are not as current as some more recent sources, the collection nonetheless remains the most comprehensive source of data for business data services. We will therefore again make these data available to interested parties using the same procedures the Commission previously used.394

B. Eliminating Ex Ante Pricing Regulation of Lower Capacity TDM Transport Provided by Carriers that Receive Fixed Universal Service Support and Elect Incentive Regulation for Their BDS Offerings

157. We also seek comment on providing a path to eliminating ex ante pricing regulation of lower capacity (i.e., at or below a DS3 bandwidth level) TDM transport services, including other transport (i.e., non-end user channel termination) special access services,395 offered by rate-of-return carriers that receive fixed high-cost universal service support, and elect the lighter touch regulatory framework provided for in the accompanying Order (electing carriers). In the accompanying order, we move electing carriers’ lower capacity circuit-based BDS, including their TDM transport and end user channel terminations, to incentive regulation, and allow electing carriers to offer those services subject to pricing flexibility that includes contract tariff pricing and term and volume discount plans. We also adopt a competitive market test for removing ex ante pricing regulation from electing carriers’ lower capacity TDM end user channel terminations. However, based on the current record, in the order, we neither adopt a competitive market test for electing carriers’ lower capacity TDM transport, nor do we eliminate all ex ante pricing regulation for lower capacity TDM transport provided by electing carriers. As the Commission explained in the Notice, competition for electing carriers’ lower capacity TDM transport may not be as robust in the less dense and more rural study areas that rate-of-return carriers typically serve, compared to denser and more populated price cap study areas.396

158. The Commission has long recognized transport is more competitive than end user channel terminations and required a different competitive showing for reduced pricing regulation.397 Given that we are proposing to eliminate ex ante pricing regulation of TDM transport services in price cap areas, we also seek further comment on whether, and under what circumstances, we should remove ex

393 Id. at 3533, para. 167.394 Special Access for Price Cap Local Exchange Carriers; AT&T Corporation Petition for Rulemaking to Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services, WC Docket No. 05-25, RM-10593, Order and Data Collection Protective Order, 29 FCC Rcd 11657 (WCB 2014) (Protective Order); Order and Modified Data Collection Protective Order, 30 FCC Rcd 10027 (WCB 2015) (Modified Protective Order); see also Special Access for Price Cap Local Exchange Carriers; AT&T Corporation Petition for Rulemaking to Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services, WC Docket No. 05-25, RM-10593, Report and Order and Further Notice of Proposed Rulemaking, 27 FCC Rcd 16318, 16340, para. 52 (2012) (delegating limited authority to the Bureau to implement the 2015 Collection).395 See supra n.369.396 Regulation of Business Data Services for Rate-of-Return Local Exchange Carriers, WC Docket No. 17-144, Notice of Proposed Rulemaking, FCC 18-46, at 8, para. 14 (rel. April 18, 2018) (Notice). 397 BDS Order, 32 FCC Rcd at 3495, para. 77; see also Pricing Flexibility Order, 14 FCC Rcd at 14278-79, paras. 101-02.


56

ante pricing regulation for electing carriers’ lower capacity TDM transport.398 In the accompanying order, we decline to remove ex ante pricing regulation of TDM transport services because the record lacked data sufficient to justify such a step.399 We invite commenters to provide or identify data that would justify further pricing deregulation of electing carriers’ lower capacity TDM transport.

159. If there are such data, should we use that data to adopt a competitive market test for determining whether to relieve electing carriers’ lower capacity TDM transport of ex ante pricing regulation in a particular study area? Were we to adopt a competitive market test for electing carriers’ lower capacity TDM transport, how should it be structured? Should such a test largely mirror the structure of the competitive market test we adopt in the accompanying order for lower capacity TDM end user channel terminations?

160. If we adopt a competitive market test for lower capacity TDM transport offered by electing carriers, how should we implement the results of such a test? Should we adopt similar transition provisions as those we adopt for the competitive market test for electing carriers’ lower capacity TDM end user channel terminations in the accompanying order? Are there any reasons to structure the transition differently?

161. In the alternative, we seek comment on whether we should remove ex ante pricing regulations for lower capacity TDM transport offered by electing carriers nationwide. Is there data available that would show nationwide competition sufficient to remove ex ante pricing regulation? How would we analyze the data given the variability of competition in areas served by electing rate-of-return carriers? Is there evidence of competition for lower capacity TDM transport in these areas consistent with the competition the Commission determined was present in price cap areas nationwide?

162. We also seek comment on AT&T’s recommendation that we base our decisions on data specific to electing carriers and their operating territories.400 We recognize that a large data collection would be a burden on rate-of-return carriers’ limited resources, and we want to avoid imposing unnecessary regulatory burdens on them. We therefore request that commenters provide or identify additional data or other information relevant to the status of competition for lower capacity TDM transport in the study areas served by the rate-of-return carriers eligible to elect incentive regulation, including data on transport competition and competitive fiber deployment. Are there existing data collections that could be used as a proxy for the presence of lower capacity TDM transport competition in areas served by rate-of-return carriers eligible to elect incentive regulation? For example, in the BDS Order, the Commission relied in part on competitive fiber maps, building locations, and Census data to assess competition for TDM transport in price cap areas.401 Alternatively, Petitioners submitted a study in the record of this proceeding that included certain types of demographic and competitive data that they contend are reasonable proxies for lower capacity TDM transport competition in their service areas.402 Parties should comment on the usefulness of these proxies and whether there are others that could provide a reasonable basis for Commission action.

VI. PROCEDURAL MATTERS

163. Deadlines and Filing Procedures. Pursuant to sections 1.415 and 1.419 of the Commission’s rules, 47 CFR §§ 1.415, 1.419, interested parties may file comments and reply comments on or before the dates indicated on the first page of this document in Dockets WC 17-144, 16-143, 05-25.

398 Petition for Rulemaking of ITTA and USTelecom, WC Docket No. 17-144 at 6-10 (filed May 25, 2017) (Joint Petition); Petitioners’ Comments at 7-9. 399 See supra para. 82.400 AT&T Reply at 6-8. 401 BDS Order, 32 FCC Rcd at 3501, para. 91. 402 See Petitioners’ Comments, Exh. A.


57

Comments may be filed using the Commission’s Electronic Comment Filing System (ECFS).403

Electronic Filers: Comments may be filed electronically using the Internet by accessing the ECFS: http://apps.fcc.gov/ecfs/.

Paper Filers: Parties who choose to file by paper must file an original and one copy of each filing. If more than one docket or rulemaking number appears in the caption of this proceeding, filers must submit two additional copies for each additional docket or rulemaking number.

Filings can be sent by hand or messenger delivery, by commercial overnight courier, or by first-class or overnight U.S. Postal Service mail. All filings must be addressed to the Commission’s Secretary: Office of the Secretary, Federal Communications Commission.

All hand-delivered or messenger-delivered paper filings for the Commission’s Secretary must be delivered to FCC Headquarters at 445 12th St., SW, Room TW-A325, Washington, DC 20554. The filing hours are 8:00 a.m. to 7:00 p.m. All hand deliveries must be held together with rubber bands or fasteners. Any envelopes and boxes must be disposed of before entering the building.

Commercial overnight mail (other than U.S. Postal Service Express Mail and Priority Mail) must be sent to 9050 Junction Drive, Annapolis Junction, MD 20701.

U.S. Postal Service first-class, Express, and Priority mail must be addressed to 445 12th Street, SW, Washington DC 20554.

People with Disabilities: To request materials in accessible formats for people with disabilities (braille, large print, electronic files, audio format), send an email to [email protected] or call the Consumer & Governmental Affairs Bureau at 202-418-0530 (voice), 202-418-0432 (TTY).

164. This proceeding shall be treated as a “permit-but-disclose” proceeding in accordance with the Commission’s ex parte rules.404 Persons making ex parte presentations must file a copy of any written presentation or a memorandum summarizing any oral presentation within two business days after the presentation (unless a different deadline applicable to the Sunshine period applies). Persons making oral ex parte presentations are reminded that memoranda summarizing the presentation must (1) list all persons attending or otherwise participating in the meeting at which the ex parte presentation was made, and (2) summarize all data presented and arguments made during the presentation. If the presentation consisted in whole or in part of the presentation of data or arguments already reflected in the presenter’s written comments, memoranda or other filings in the proceeding, the presenter may provide citations to such data or arguments in his or her prior comments, memoranda, or other filings (specifying the relevant page and/or paragraph numbers where such data or arguments can be found) in lieu of summarizing them in the memorandum. Documents shown or given to Commission staff during ex parte meetings are deemed to be written ex parte presentations and must be filed consistent with rule 1.1206(b). In proceedings governed by Rule 1.49(f) or for which the Commission has made available a method of electronic filing, written ex parte presentations and memoranda summarizing oral ex parte presentations, and all attachments thereto, must be filed through the electronic comment filing system available for that proceeding, and must be filed in their native format (e.g., .doc, .xml, .ppt, searchable .pdf). Participants in this proceeding should familiarize themselves with the Commission’s ex parte rules.

165. Paperwork Reduction Act Analysis. This document contains new information collection requirements subject to the PRA. It will be submitted to OMB for review under section 3507(d) of the PRA. OMB, the general public, and other Federal agencies are invited to comment on the new information collection requirements contained in this proceeding. In addition, we note that pursuant to

403 See Electronic Filing of Documents in Rulemaking Proceedings, 63 Fed. Reg. 24121 (1998).404 47 CFR § 1.1200 et seq.

http://apps.fcc.gov/ecfs/

mailto:[email protected]


58

the Small Business Paperwork Relief Act of 2002,405 we previously sought specific comment on how the Commission might further reduce the information collection burden for small business concerns with fewer than 25 employees.406 We describe impacts that might affect small businesses, which includes most businesses with fewer than 25 employees, in the Final Regulatory Flexibility Analysis in Appendix B.

166. Congressional Review Act. The Commission will send a copy of this Report and Order to Congress and the Government Accountability Office pursuant to the Congressional Review Act.407

167. Initial Regulatory Flexibility Analysis. Pursuant to the Regulatory Flexibility Act (RFA),408 the Commission has prepared an Initial Regulatory Flexibility Analysis (IRFA) of the possible significant economic impact on small entities of the policies and actions considered in the Further Notice of Proposed Rulemaking and Second Further Notice of Proposed Rulemaking. The text of the IRFA is set forth in Appendix C. Written public comments are requested on this IRFA. Comments must be identified as responses to the IRFA and must be filed by the deadlines for comment on the Further Notice of Proposed Rulemaking and Second Further Notice of Proposed Rulemaking. The Commission’s Consumer and Governmental Affairs Bureau, Reference Information Center, will send a copy of this Further Notice of Proposed Rulemaking and Second Further Notice of Proposed Rulemaking, including the IRFA, to the Chief Counsel for Advocacy of the Small Business Administration (SBA).409

168. Final Regulatory Flexibility Analysis. As required by the Regulatory Flexibility Act (RFA),410 an Initial Regulatory Flexibility Analysis (IRFA) was incorporated into the Notice.411 The Commission sought written public comment on the possible significant economic impact on small entities regarding the proposals addressed in the Notice, including comments on the IRFA. Pursuant to the RFA, a Final Regulatory Flexibility Analysis is set forth in Appendix B.

169. Contact Person. For further information about this proceeding, please contact Justin Faulb, FCC Wireline Competition Bureau, Pricing Policy Division, 445 12th Street, S.W., Washington, D.C. 20554, (202) 418-1589, [email protected].

VII. ORDERING CLAUSES

170. ACCORDINGLY, IT IS ORDERED that, pursuant to sections 1, 2, 4(i)–(j), 10, 201(b), 202(a), 214, 303(r), 403, of the Communications Act of 1934, as amended, and section 706 of the Telecommunications Act of 1996, 47 U.S.C. §§ 151, 152, 154(i)–(j), 160, 201(b), 202(a), 214, 303(r), 403, 1302, this Report and Order IS ADOPTED and SHALL BE EFFECTIVE sixty (60) days after publication in the Federal Register, except to the extent expressly addressed below.

171. IT IS FURTHER ORDERED that Parts 1, 32, 51, 61, and 69 of the Commission’s rules, 47 CFR Parts 1, 32, 51, 61, and 69, ARE AMENDED as set forth in Appendix A, and that such rule amendments SHALL BE EFFECTIVE sixty (60) days after publication of this Report and Order in the Federal Register, except for section 61.50, 47 CFR § 61.50, which contains information collections that require approval by the Office of Management and Budget under the Paperwork Reduction Act and SHALL BECOME EFFECTIVE after announcement in the Federal Register of its approval by the Office of Management and Budget, and on the effective dates announced therein. The Federal Communications Commission will publish documents in the Federal Register announcing the effective dates.

405 Public Law 107-198, see 44 U.S.C. § 3506(c)(4).406 Notice, para. 67. No comments were filed in response to our request.407 See 5 U.S.C. § 801(a)(1)(A).408 See 5 U.S.C. § 603.409 See 5 U.S.C. § 603(a).410 See 5 U.S.C. § 603.411 Notice at 25-26, para. 66. No comments were filed in response to the Commission’s request.

mailto:[email protected]


59

172. IT IS FURTHER ORDERED that pursuant to sections 201(b) and 202(a) of the Communications Act of 1934, as amended, 47 U.S.C. §§ 201(b), 202(a), rate-of-return carriers electing to offer business data services SHALL FREEZE the tariffed rates for packet-based and higher capacity TDM services and for TDM end-user channel terminations at or below a DS3 in study areas deemed competitive that the rate-of-return carrier continues to tariff for six (6) months following the applicable effective date of the carrier’s election.

173. IT IS FURTHER ORDERED that the Commission’s Consumer & Governmental Affairs Bureau, Reference Information Center, SHALL SEND a copy of this Report and Order to Congress and the Government Accountability Office pursuant to the Congressional Review Act, see 5 U.S.C. 801(a)(1)(A).

174. IT IS FURTHER ORDERED, that the Commission’s Consumer & Governmental Affairs Bureau, Reference Information Center, SHALL SEND a copy of this Report and Order, Second Further Notice of Proposed Rulemaking, and Further Notice of Proposed Rulemaking, including the Final Regulatory Flexibility Analysis and the Initial Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business Administration.

175. IT IS FURTHER ORDERED, pursuant to sections 1, 4(i), 10, and 201(b) of the Communication Act of 1934, as amended, 47 U.S.C. §§ 151, 154(i), 160, and 201(b) that this Second Further Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking ARE ADOPTED.

FEDERAL COMMUNICATIONS COMMISSION

Marlene H. DortchSecretary


60

APPENDIX A

RULES

The Federal Communications Commission amends 47 CFR parts 1, 32, 51, 61, and 69 as follows:

PART 1 – PRACTICE AND PROCEDURE

1. Section 1.1409 is amended by revising paragraph (g) to read as follows:

§ 1.1409 Commission consideration of the complaint.

(a) * * * * *

(g) A price cap company, or a rate-of-return carrier electing to provide service pursuant to § 61.50 of this chapter, that opts-out of Part 32 may calculate attachment rates for its poles, ducts, conduits, and rights of way using either Part 32 accounting data or GAAP accounting data. A company using GAAP accounting data to compute rates to attach to its poles, ducts, conduits, and rights of way in any of the first twelve years after opting-out must adjust (increase or decrease) its annually computed GAAP-based rates by an Implementation Rate Difference for each of the remaining years in the period. The Implementation Rate Difference means the difference between attachment rates calculated by the carrier under Part 32 and under GAAP as of the last full year preceding the carrier’s initial opting-out of Part 32 USOA accounting requirements.

PART 32 – UNIFORM SYSTEM OF ACCOUNTS FOR TELECOMMUNICATIONS COMPANIES

2. Section 32.1 is amended to read as follows:

§ 32.1 Background.

The revised Uniform System of Accounts (USOA) is a historical financial accounting system which reports the results of operational and financial events in a manner which enables both management and regulators to assess these results within a specified accounting period. The USOA also provides the financial community and others with financial performance results. In order for an accounting system to fulfill these purposes, it must exhibit consistency and stability in financial reporting (including the results published for regulatory purposes). Accordingly, the USOA has been designed to reflect stable, recurring financial data based to the extent regulatory considerations permit upon the consistency of the well-established body of accounting theories and principles commonly referred to as generally accepted accounting principles (GAAP). The rules of this part, and any other rules or orders that are derivative of or dependent on these Part 32 rules, do not apply to price cap companies, and rate-of-return telephone companies offering business data services pursuant to § 61.50 of this chapter, that have opted-out of USOA requirements pursuant to the conditions specified by the Commission in § 32.11(g).

3. Section 32.11 is amended by revising paragraph (g) to read:

§ 32.11 Companies Subject to Part 32.

(a) * * * * *


61

(g) Notwithstanding subsection (a), a price cap company, or a rate-of-return telephone company offering business data services pursuant to § 61.50 of this chapter, that elects to calculate its pole attachment rates pursuant to § 1.1409(g) of this chapter will not be subject to this Uniform System of Accounts.

PART 51 - INTERCONNECTION

4. Section 51.903 is amended by revising paragraph (g) to read:

§ 51.903 Definitions.

(a) * * * * *

(g) Rate-of-Return Carrier is any incumbent local exchange carrier not subject to price cap regulation as that term is defined in §61.3(bb) of this chapter, but only with respect to the territory in which it operates as an incumbent local exchange carrier.

PART 61 - TARIFFS

5. Section 61.41 is amended by revising paragraph (d) and adding paragraph (f) to read as follows:

§ 61.41 Price cap requirements generally.

(a) * * * * *

(d) Except as provided in paragraph (e) of this section, local exchange carriers that become subject to price cap regulation as that term is defined in § 61.3(ff) shall not be eligible to withdraw from such regulation.

(e) * * * * *

(f) Notwithstanding the requirements of paragraphs (c) and (d) of this section, a telephone company subject to rate-of-return regulation that is affiliated with a price cap local exchange carrier may provide business data services pursuant to § 61.50 without converting other services to price cap regulation.

6. Section 61.50 is added to read as follows:

§ 61.50 Regulation of business data services offered by rate-of-return carriers electing incentive regulation.

(a) A rate-of-return carrier, as defined in § 51.903(g), may elect to offer its business data services subject to incentive regulation pursuant to this section. A rate-of-return carrier may elect to offer business data services subject to incentive regulation pursuant to this section only if all affiliated rate-of-return carriers meeting the requirements of paragraph (b) make the election. A carrier’s election under this section is irrevocable.

(b) A rate-of-return carrier is eligible to elect incentive regulation for its business data services if the carrier:

(1) receives universal service payments pursuant to the Alternative-Connect America Cost Model pursuant to § 54.311;


62

(2) is an affiliate of a price cap local exchange carrier operating pursuant to a waiver of § 61.41;

(3) receives universal service payments pursuant to § 54.306; or

(4) transitions away from legacy support mechanisms in the future.

(c) A rate-of-return carrier electing to offer business data services pursuant to this section shall employ the procedures outlined in §§ 61.42 through .49 to calculate rates for its business data services and adjust its indexes for those rates to the extent those sections are applicable to business data services, except that:

(1) Exogenous costs associated with regulated services shall be allocated to business data services based on relative regulated business data services revenues, compared to regulated revenues and related support receipts; and

(2) An electing carrier is not required to file a short form tariff review plan as required by § 61.49(k) of this part.

(d) A rate-of-return carrier electing to offer business data services pursuant to this section must remove its business data services from the NECA Traffic Sensitive Pool. Such a carrier may continue to participate in the NECA Traffic Sensitive Pool and tariff for access services other than business data services.

(e) A rate-of-return carrier offering business data services pursuant to this section may offer those business data services at different rates in different study areas.

(f) A rate-of-return carrier offering business data services pursuant to this section may make a low-end adjustment pursuant to § 61.45(d)(1)(vii) of this subpart unless it:

(1) Exercises the regulatory relief pursuant to paragraph (g) of this section in any part of its service region; or

(2) Exercises the option to use Generally Accepted Accounting Principles rather than the Part 32 Uniform System of Accounts pursuant to § 32.11(g) of this chapter.

(g) A rate-of-return carrier electing to offer business data services pursuant to this section may offer time division multiplexed transport and end user channel termination services at or below a DS3 bandwidth that include:

(1) Volume and term discounts;

(2) Contract-based tariffs, provided that:

(i) Contract-based tariff services are made generally available to all similarly situated customers;

(ii) The rate-of-return carrier excludes all contract-based tariff offerings from incentive regulation; and

(3) The ability to file tariff revisions on at least one day’s notice, notwithstanding the notice requirements for tariff filings specified in § 61.58 of this chapter.


63

(h) A rate-of-return carrier electing to offer business data services pursuant to this section shall comply with the requirements of § 69.805 of this chapter in its study areas deemed non-competitive pursuant to this section.

(i) The regulation of other services offered by a carrier that offers business data services pursuant to this section shall not be modified as a result of the requirements of this section.

(j) Competitive market test.

(1) The Wireline Competition Bureau will conduct an initial competitive market test for rate-of-return carriers eligible to elect incentive regulation pursuant to this section. Study areas of such carriers will be deemed competitive if 75 percent of the census blocks within the study area are reported to have a minimum of 10 Mbps download and 1 Mbps upload broadband service offered by a cable operator based on the most current publicly available Form 477 data. A list of study areas deemed competitive by the competitive market test will be published on the Commission's website.

(2) The Wireline Competition Bureau will conduct subsequent competitive market tests for rate-of-return carriers electing incentive regulation pursuant to this section contemporaneously with the subsequent tests mandated by § 69.803 for price cap carriers.

(3) A study area of an electing carrier deemed competitive by the competitive market test will retain its status in subsequent tests.

(k) Regulatory relief.

(1) Packet-based and time division multiplexed business data services above a DS3 bandwidth offered by a rate-of-return carrier pursuant to this section shall not be subject to ex ante pricing regulation.

(2) Time division multiplexed end user channel termination business data services at or below a DS3 bandwidth offered by a rate-of-return carrier pursuant to this section in study areas deemed competitive by the competitive market test shall not be subject to ex ante pricing regulation.

(3) A rate-of-return carrier electing incentive regulation for its business data services must detariff

(i) all packet-based and time division multiplexed business data services above a DS3 bandwidth within thirty-six months after the effective date of its election of incentive regulation; and

(ii) all time division multiplexed end user channel termination business data services at or below a DS3 bandwidth in any study area deemed competitive by the competitive market test within thirty-six months after such services shall be deemed competitive in a study area.

(l) Notification.

(1) A rate-of-return carrier electing incentive regulation for its business data services effective July 1, 2019 must notify the Chief of the Wireline Competition Bureau of its election by May 1, 2019 for it to become effective concurrent with the annual access tariff filing in 2019.

(2) A rate-of-return carrier electing incentive regulation for its business data services effective July 1, 2020 must notify the Chief of the Wireline Competition Bureau of its election by May 1, 2020 for it to become effective concurrent with the annual access tariff filing in 2020.


64

(3) A rate-of-return carrier accepting future offers of Alternative-Connect America Cost Model support or otherwise transitioning away from legacy support mechanisms and electing incentive regulation for its business data services must notify the Chief of the Wireline Competition Bureau of its election by May 1 following its acceptance of the offer for it to become effective concurrent with that year’s annual access tariff filing.

7. Section 61.55 is amended by revising paragraph (a) to read as follows:

§ 61.55 Contract-based tariffs.

(a) This section shall apply to price cap local exchange carriers permitted to offer contract-based tariffs under § 1.776 or § 69.805 of this chapter, as well as to the offering of business data services by rate-of-return carriers pursuant to § 61.50 of this part.

PART 69 – ACCESS CHARGES

8. Section 69.114 is amended by revising paragraph (a) to read as follows:

§ 69.114 Special Access.

(a) Appropriate subelements shall be established for the use of equipment or facilities that are assigned to the Special Access element for purposes of apportioning net investment, or that are equivalent to such equipment or facilities for companies subject to price cap regulation as that term is defined in §61.3(ff) of this chapter.


65

APPENDIX B

PROPOSED RULES

The Federal Communications Commission seeks comment on a proposal to amend 47 CFR part 61, as follows:

PART 61 - TARIFFS

1. Section 61.201 is amended by revising paragraph (a) to read:

§ 61.201 Detariffing of price cap local exchange carriers.

*****

(a)(3) Transport services as defined in § 69.801 of this chapter;

PART 69 – ACCESS CHARGES

1. Section 69.807(a) is revised to read as follows:

§ 69.807 Regulatory relief.

(a) Price cap local exchange carrier transport and end user channel terminations in markets deemed competitive and in grandfathered markets for a price cap carrier that was granted Phase II pricing flexibility prior to June 2017 are granted the following regulatory relief:

(1) Elimination of the rate structure requirements in subpart B of this part;

(2) Elimination of price cap regulation; and

(3) Elimination of tariffing requirements as specified in § 61.201 of this chapter.


66

APPENDIX C

Final Regulatory Flexibility Analysis

1. As required by the Regulatory by the Regulatory Flexibility Act of 1980, as amended (RFA)1 an Initial Regulatory Flexibility Analysis (IRFA) was incorporated into the Notice of Proposed Rulemaking (Notice) for the rate-of-return business data services (BDS) proceeding.2 The Commission sought written public comment on the proposals in the Notice, including comment on the IRFA. The Commission received no comments on the IRFA. Because the Commission amends its rules in this Report and Order, the Commission has included this Final Regulatory Flexibility Analysis (FRFA). This present FRFA conforms to the RFA.3

A. Need for, and Objectives of, the Rules

2. In the Notice, the Commission proposed to adopt a form of incentive regulation for the provision of business data services by rate-of-return carriers receiving fixed universal service support, conduct a market analysis to evaluate the characteristics of BDS markets served by rate-of-return carriers receiving fixed support, and adopt a new lighter touch regulatory framework for these carriers’ BDS that in most respects parallels the framework recently adopted for price cap carriers in the BDS Order. This Order provides a new framework for BDS offered by rate-of-return carriers that receive fixed support that minimizes unnecessary regulatory burdens on certain rate-of-return carriers and allows market forces to foster appropriate incentives for these carriers to be efficient, to innovate and to compete.4

3. In this Order, the Commission takes the next step in a series of steps to encourage carriers to move from rate-of-return to incentive regulation, and to remove ex ante pricing regulation where competitive conditions justify doing so. This Order focuses on allowing rate-of-return carriers that currently receive fixed high-cost universal service support to voluntarily elect to transition out of rate-of-return regulation for their BDS offerings. In so doing, the Commission amends its rules to allow such carriers to move their lower capacity time division multiplexing (TDM) circuit-based transport and end user channel termination offerings to incentive regulation while providing a path for those carriers that elect our new framework (electing carriers) to demonstrate that their lower capacity circuit-based end user channel termination offerings are competitive, and therefore should not be subject to ex ante pricing regulation. We also remove ex ante pricing regulation from electing carriers’ higher capacity circuit-based and their packet-based BDS offerings.

4. Allowing rate-of-return carriers that receive fixed support to move their BDS offerings away from rate-of-return regulation will help drive competition for BDS offerings in the communities served by those carriers. It will also reduce unnecessary regulatory burdens faced by electing carriers. They will no longer be required to provide cost-based justification for their BDS rates and will therefore no longer need to conduct annual cost studies to justify those rates. They will also no longer be required to file tariffs for their packed-based and higher capacity TDM-based end user channel terminations offerings in areas deemed competitive. The regulatory burdens on electing carriers, most of which are small entities, will be vastly reduced.

5. We take these steps while affirming our core statutory obligations pursuant to sections 201, 202, and 208 of the Communications Act to ensure that the rates and practices of these carriers’ BDS remain just, reasonable and not unreasonably discriminatory. Collectively, these actions will streamline

1 See 5 U.S.C. § 603. The RFA, see 5 U.S.C. §§ 601-612, has been amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, 110 Stat. 847 (1996). 2 Regulation of Business Data Services for Rate-of-Return Local Exchange Carriers, WC Docket No. 17-144, Notice of Proposed Rulemaking, FCC 18-46 (rel. April 18, 2018) (Notice). 3 See 5 U.S.C. § 604.4 See Notice at 7, para. 10.


67

regulation, and spur entry, investment, innovation, and competition in the affected BDS markets to the benefit of businesses and other institutional users that rely on these services.

B. Summary of Significant Issues Raised by Public Comments in Response to the IRFA

6. The Commission did not receive comments specifically addressing the rules and policies proposed in the IRFA.

C. Response to Comments by the Chief Counsel for Advocacy of the Small Business Administration

7. The Chief Counsel did not file any comments in response to this proceeding.

D. Description and Estimate of the Number of Small Entities to Which the Rules Will Apply

8. The RFA directs agencies to provide a description of, and where feasible, an estimate of the number of small entities that may be affected by the proposed rules, if adopted.5 The RFA generally defines the term “small entity” as having the same meaning as the terms “small business,” “small organization,” and “small governmental jurisdiction.”6 In addition, the term “small business” has the same meaning as the term “small-business concern” under the Small Business Act.7 A small-business concern” is one which: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the Small Business Administration (SBA).8

1. Total Small Entities

9. Our proposed action, if implemented, may, over time, affect small entities that are not easily categorized at present. We therefore describe here, at the outset, three comprehensive, statutory small entity size standards.9 First, as of 2013, the SBA estimates there are an estimated 28.8 million small businesses nationwide—comprising some 99.9% of all businesses.10 In addition, a “small organization” is generally “any not-for-profit enterprise which is independently owned and operated and is not dominant in its field.”11 Nationwide, as of 2007, there were approximately 1,621,315 small organizations.12 Finally, the term “small governmental jurisdiction” is defined generally as “governments of cities, towns, townships, villages, school districts, or special districts, with a population of less than fifty thousand.”13 Census Bureau data for 2012 indicate that there were 90,056 local governmental jurisdictions in the

5 See 5 U.S.C. § 603(b)(3).6 See 5 U.S.C. § 601(6).7 See 5 U.S.C. § 601(3) (incorporating by reference the definition of “small-business concern” in the Small Business Act, 15 U.S.C. § 632). Pursuant to 5 U.S.C. § 601(3), the statutory definition of a small business applies “unless an agency, after consultation with the Office of Advocacy of the Small Business Administration and after opportunity for public comment, establishes one or more definitions of such term which are appropriate to the activities of the agency and publishes such definition(s) in the Federal Register.”8 See 15 U.S.C. § 632.9 See 5 U.S.C. §§ 601(3)-(6).10 See Small Bus. Admin., Office of Advocacy, Frequently Asked Questions about Small Business 1 (2016), https://www.sba.gov/sites/default/files/advocacy/SB-FAQ-2016_WEB.pdf.11 5 U.S.C. § 601(4).12 Indep. Sector, The New Nonprofit Almanac and Desk Reference (2010).13 5 U.S.C. § 601(5).

https://www.sba.gov/sites/default/files/advocacy/SB-FAQ-2016_WEB.pdf


68

United States.14 We estimate that, of this total, as many as 89,195 entities may qualify as “small governmental jurisdictions.”15 Thus, we estimate that most governmental jurisdictions are small.

2. Broadband Internet Access Service Providers

10. Internet Service Providers (Broadband). Broadband Internet service providers include wired (e.g., cable, DSL) and VoIP service providers using their own operated wired telecommunications infrastructure fall in the category of Wired Telecommunication Carriers.16 Wired Telecommunications Carriers are comprised of establishments primarily engaged in operating and/or providing access to transmission facilities and infrastructure that they own and/or lease for the transmission of voice, data, text, sound, and video using wired telecommunications networks. Transmission facilities may be based on a single technology or a combination of technologies.17 The SBA size standard for this category classifies a business as small if it has 1,500 or fewer employees.18 U.S. Census data for 2012 show that there were 3,117 firms that operated that year. Of this total, 3,083 operated with fewer than 1,000 employees.19 Consequently, under this size standard the majority of firms in this industry can be considered small.

3. Wireline Providers

11. Wired Telecommunications Carriers. The U.S. Census Bureau defines this industry as “establishments primarily engaged in operating and/or providing access to transmission facilities and infrastructure that they own and/or lease for the transmission of voice, data, text, sound, and video using wired communications networks. Transmission facilities may be based on a single technology or a combination of technologies. Establishments in this industry use the wired telecommunications network facilities that they operate to provide a variety of services, such as wired telephony services, including VoIP services, wired (cable) audio and video programming distribution, and wired broadband internet services. By exception, establishments providing satellite television distribution services using facilities and infrastructure that they operate are included in this industry.”20 The SBA has developed a small business size standard for Wired Telecommunications Carriers, which consists of all such companies having 1,500 or fewer employees.21 Census data for 2012 show that there were 3,117 firms that operated

14 See U.S. Census Bureau, American Fact Finder, Local Governments by Type and State: 2012, http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=COG_2012_ORG02.US01&prodType=table (last visited Oct. 19, 2016).15 The 2012 Census data for small governmental organizations are not presented based on the size of the population in each organization. As stated above, there were 90,056 local governmental organizations in 2012. As a basis for estimating how many of these 90,056 local organizations were small, in 2012 we note that there were a total of 861 cities and towns (incorporated places and minor civil divisions) with populations greater than or equal to 50,000. See U.S. Census Bureau, Subcounty General-Purpose Governments by Population-Size Group and State: 2012 – United States - States, 2012 Census of Governments, http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=COG_2012_ORG07.US01&prodType=table (last visited Oct. 19, 2016). If we subtract the 861 cities and towns that exceed the 50,000 population threshold, we conclude that approximately 89,195 are small.16 See, 13 CFR § 121.201. The Wired Telecommunications Carrier category formerly used the NAICS code of 517110. As of 2017 the U.S. Census Bureau definition show the NAICs code as 517311. See, https://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517311&search=2017 17 Id.18 Id.19 http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml? pid=ECN_2012_US_51SSSZ2&prodType=table.20 U.S. Census Bureau, NAICS Search, http://www.census.gov/cgi-bin/sssd/naics/naicsrch (last visited June 21, 2017)21 13 CFR § 121.201 (NAICS Code 517110).

http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=COG_2012_ORG02.US01&prodType=table




https://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517311&search=2017

http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?%20pid=ECN_2012_US_51SSSZ2&prodType=table


http://www.census.gov/cgi-bin/sssd/naics/naicsrch


69

that year. Of this total, 3,083 operated with fewer than 1,000 employees.22 Thus, under this size standard, the majority of firms in this industry can be considered small.

12. Incumbent Local Exchange Carriers (Incumbent LECs). Neither the Commission nor the SBA has developed a small business size standard specifically for incumbent LEC services. The closest applicable size standard under SBA rules is for the category Wired Telecommunications Carriers as defined above. Under that size standard, such a business is small if it has 1,500 or fewer employees.23 According to Commission data, 3,117 firms operated in that year. Of this total, 3,083 operated with fewer than 1,000 employees.24 Consequently, the Commission estimates that most providers of incumbent local exchange service are small businesses that may be affected by the rules and policies adopted. A total of 1,307 firms reported that they were incumbent local exchange service providers.25 Of this total, an estimated 1,006 have 1,500 or fewer employees.26

13. Competitive Local Exchange Carriers (Competitive LECs), Competitive Access Providers (CAPs), Shared-Tenant Service Providers, and Other Local Service Providers. Neither the Commission nor the SBA has developed a small business size standard specifically for these service providers. The appropriate NAICS Code category is Wired Telecommunications Carriers, as defined above. Under that size standard, such a business is small if it has 1,500 or fewer employees.27 U.S. Census data for 2012 indicate that 3,117 firms operated during that year. Of that number, 3,083 operated with fewer than 1,000 employees.28 Based on this data, the Commission concludes that the majority of Competitive LECS, CAPs, Shared-Tenant Service Providers, and Other Local Service Providers, are small entities. According to Commission data, 1,442 carriers reported that they were engaged in the provision of either competitive local exchange services or competitive access provider services.29 Of these 1,442 carriers, an estimated 1,256 have 1,500 or fewer employees.30 In addition, 17 carriers have reported that they are Shared-Tenant Service Providers, and all 17 are estimated to have 1,500 or fewer employees.31 Also, 72 carriers have reported that they are Other Local Service Providers.32 Of this total,

22 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016) http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.23 13 CFR § 121.201 (NAICS Code 517110).24 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016) http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.25 See Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf. 26 See Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.27 13 CFR § 121.201 (NAICS Code 517110).28 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016) http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.29 See Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.30 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.31 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.

http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table




http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf








70

70 have 1,500 or fewer employees.33 Consequently, based on internally researched FCC data, the Commission estimates that most providers of competitive local exchange service, competitive access providers, Shared-Tenant Service Providers, and Other Local Service Providers are small entities.

14. We have included small incumbent LECs in this present RFA analysis. As noted above, a “small business” under the RFA is one that, inter alia, meets the pertinent small business size standard (e.g., a telephone communications business having 1,500 or fewer employees), and “is not dominant in its field of operation.”34 The SBA’s Office of Advocacy contends that, for RFA purposes, small incumbent LECs are not dominant in their field of operation because any such dominance is not “national” in scope.35 We have therefore included small incumbent LECs in this RFA analysis, although we emphasize that this RFA action has no effect on Commission analyses and determinations in other, non-RFA contexts.

15. Interexchange Carriers (IXCs). Neither the Commission nor the SBA has developed a definition for Interexchange Carriers. The closest NAICS Code category is Wired Telecommunications Carriers as defined above. The applicable size standard under SBA rules is that such a business is small if it has 1,500 or fewer employees.36 U.S. Census data for 2012 indicates that 3,117 firms operated during that year. Of that number, 3,083 operated with fewer than 1,000 employees.37 According to internally developed Commission data, 359 companies reported that their primary telecommunications service activity was the provision of interexchange services.38 Of this total, an estimated 317 have 1,500 or fewer employees.39 Consequently, the Commission estimates that the majority of IXCs are small entities that may be affected by our proposed rules.

16. Local Resellers. The SBA has developed a small business size standard for the category of Telecommunications Resellers. The Telecommunications Resellers industry comprises establishments engaged in purchasing access and network capacity from owners and operators of telecommunications networks and reselling wired and wireless telecommunications services (except satellite) to businesses and households. Establishments in this industry resell telecommunications; they do not operate transmission facilities and infrastructure. Mobile virtual network operators (MVNOs) are included in this industry.40 Under that size standard, such a business is small if it has 1,500 or fewer employees.41 Census data for 2012 show that 1,341 firms provided resale services during that year. Of that number, all

(Continued from previous page) 32 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.33 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.34 5 U.S.C. § 601(3).35 Letter from Jere W. Glover, Chief Counsel for Advocacy, SBA, to William E. Kennard, Chairman, FCC (filed May 27, 1999). The Small Business Act contains a definition of “small business concern,” which the RFA incorporates into its own definition of “small business.” 15 U.S.C. § 632(a); 5 U.S.C. § 601(3). SBA regulations interpret “small business concern” to include the concept of dominance on a national basis. 13 CFR § 121.102(b).36 13 CFR § 121.201 (NAICS Code 517110).37 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016), http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.38 See Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.39 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.40 U.S. Census Bureau, 2012 NAICS Definition, https://www.census.gov/cgi-bin/sssd/naics/naicsrch?input=517911&search=2012+NAICS+Search&search=2012 (last visited Mar. 26, 2018).41 13 CFR § 121.201 (NAICS code 517911).







https://www.census.gov/cgi-bin/sssd/naics/naicsrch?input=517911&search=2012+NAICS+Search&search=2012



71

operated with fewer than 1,000 employees.42 Thus, under this category and the associated small business size standard, the majority of these prepaid calling card providers can be considered small entities.

17. Toll Resellers. The Commission has not developed a definition for Toll Resellers. The closest NAICS Code Category is Telecommunications Resellers. The Telecommunications Resellers industry comprises establishments engaged in purchasing access and network capacity from owners and operators of telecommunications networks and reselling wired and wireless telecommunications services (except satellite) to businesses and households. Establishments in this industry resell telecommunications; they do not operate transmission facilities and infrastructure. Mobile virtual network operators (MVNOs) are included in this industry.43 The SBA has developed a small business size standard for the category of Telecommunications Resellers.44 Under that size standard, such a business is small if it has 1,500 or fewer employees.45 Census data for 2012 show that 1,341 firms provided resale services during that year. Of that number, 1,341 operated with fewer than 1,000 employees.46 Thus, under this category and the associated small business size standard, the majority of these resellers can be considered small entities. According to Commission data, 881 carriers have reported that they are engaged in the provision of toll resale services.47 Of this total, an estimated 857 have 1,500 or fewer employees.48 Consequently, the Commission estimates that the majority of toll resellers are small entities.

18. Other Toll Carriers. Neither the Commission nor the SBA has developed a definition for small businesses specifically applicable to Other Toll Carriers. This category includes toll carriers that do not fall within the categories of interexchange carriers, operator service providers, prepaid calling card providers, satellite service carriers, or toll resellers. The closest applicable NAICS Code category is for Wired Telecommunications Carriers as defined above. Under the applicable SBA size standard, such a business is small if it has 1,500 or fewer employees.49 Census data for 2012 show that there were 3,117 firms that operated that year. Of this total, 3,083 operated with fewer than 1,000 employees.50 Thus, under this category and the associated small business size standard, the majority of Other Toll Carriers can be considered small. According to internally developed Commission data, 284 companies reported

42 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016), http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table (last visited Mar. 26, 2018). 43 U.S. Census Bureau, 2012 NAICS Definition, https://www.census.gov/cgi-bin/sssd/naics/naicsrch?input=517911&search=2012+NAICS+Search&search=2012 (last visited June 20, 2017) (NAICS 517911 Telecommunications Resellers).44 13 CFR § 121.201 (NAICS code 517911).45 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016), http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.46 U.S. Census Bureau, American Fact Finder (Jan. 08, 2016), http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.47 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.48 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.49 13 CFR § 121.201 (NAICS code 517110).50 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016), http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.














72

that their primary telecommunications service activity was the provision of other toll carriage.51 Of these, an estimated 279 have 1,500 or fewer employees.52 Consequently, the Commission estimates that most Other Toll Carriers are small entities that may be affected by rules adopted pursuant to the Second Further Notice.

19. Operator Service Providers (OSPs). Neither the Commission nor the SBA has developed a small business size standard specifically for operator service providers. The appropriate size standard under SBA rules is for the category Wired Telecommunications Carriers. Under that size standard, such a business is small if it has 1,500 or fewer employees.53 According to Commission data, 33 carriers have reported that they are engaged in the provision of operator services. Of these, an estimated 31 have 1,500 or fewer employees and two have more than 1,500 employees.54 Consequently, the Commission estimates that the majority of OSPs are small entities.

4. Wireless Providers – Fixed and Mobile

20. Wireless Telecommunications Carriers (except Satellite). This industry comprises establishments engaged in operating and maintaining switching and transmission facilities to provide communications via the airwaves. Establishments in this industry have spectrum licenses and provide services using that spectrum, such as cellular services, paging services, wireless internet access, and wireless video services.55 The appropriate size standard under SBA rules is that such a business is small if it has 1,500 or fewer employees.56 For this industry, U.S. Census data for 2012 show that there were 967 firms that operated for the entire year.57 Of this total, 955 firms had employment of 999 or fewer employees and 12 had employment of 1000 employees or more.58 Thus under this category and the associated size standard, the Commission estimates that the majority of wireless telecommunications carriers (except satellite) are small entities.

21. The Commission’s own data—available in its Universal Licensing System—indicate that, as of October 25, 2016, there are 280 Cellular licensees that will be affected by our actions today.59 The Commission does not know how many of these licensees are small, as the Commission does not collect

51 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.52 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.53 13 CFR § 121.201, NAICS code 517311.54 Trends in Telephone Service, tbl. 5.3.55 See U.S. Census Bureau, American Fact Finder—About the Data, https://factfinder.census.gov/faces/affhelp/jsf/pages/metadata.xhtml?lang=en&type=ib&id=ib.en./ECN.NAICS2012.517210 (NAICS Code 517210). 56 13 CFR § 121.201 (NAICS code 517210). 57 U.S. Census Bureau, American Fact Finder (Jan 08, 2016), https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table (NAICS 51720, “Subject Series - Estab & Firm Size: Employment Size of Establishments for the U.S.: 2012”).58 U.S. Census Bureau, American Fact Finder (Jan 08, 2016), https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table (NAICS 51720, “Subject Series - Estab & Firm Size: Employment Size of Establishments for the U.S.: 2012”). Available census data do not provide a more precise estimate of the number of firms that have employment of 1,500 or fewer employees; the largest category provided is for firms with “1000 employees or more.”59 See Fed. Commc’ns Comm’n, Universal Licensing System, http://wireless.fcc.gov/uls (last visited June 20, 2017). For the purposes of this FRFA, consistent with Commission practice for wireless services, the Commission estimates the number of licensees based on the number of unique FCC Registration Numbers.



https://factfinder.census.gov/faces/affhelp/jsf/pages/metadata.xhtml?lang=en&type=ib&id=ib.en./ECN.NAICS2012.517210


https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table




http://wireless.fcc.gov/uls


73

that information for these types of entities. Similarly, according to internally developed Commission data, 413 carriers reported that they were engaged in the provision of wireless telephony, including cellular service, Personal Communications Service, and Specialized Mobile Radio Telephony services.60 Of this total, an estimated 261 have 1,500 or fewer employees, and 152 have more than 1,500 employees.61 Thus, using available data, we estimate that the majority of wireless firms can be considered small.

22. Wireless Communications Services. This service can be used for fixed, mobile, radiolocation, and digital audio broadcasting satellite uses. The Commission defined “small business” for the wireless communications services (WCS) auction as an entity with average gross revenues of $40 million for each of the three preceding years, and a “very small business” as an entity with average gross revenues of $15 million for each of the three preceding years.62 The SBA has approved these definitions.63

23. Wireless Telephony. Wireless telephony includes cellular, personal communications services, and specialized mobile radio telephony carriers. As noted, the SBA has developed a small business size standard for Wireless Telecommunications Carriers (except Satellite).64 Under the SBA small business size standard, a business is small if it has 1,500 or fewer employees.65 According to Commission data, 413 carriers reported that they were engaged in wireless telephony.66 Of these, an estimated 261 have 1,500 or fewer employees and 152 have more than 1,500 employees.67 Therefore, a little less than one third of these entities can be considered small.

5. Cable Service Providers

24. Because section 706 requires us to monitor the deployment of broadband using any technology, we anticipate that some broadband service providers may not provide telephone service. Accordingly, we describe below other types of firms that may provide broadband services, including cable companies, MDS providers, and utilities, among others.

25. Cable and Other Subscription Programming. This industry comprises establishments primarily engaged in operating studios and facilities for the broadcasting of programs on a subscription or fee basis. The broadcast programming is typically narrowcast in nature (e.g. limited format, such as news, sports, education, or youth-oriented). These establishments produce programming in their own facilities or acquire programming from external sources. The programming material is usually delivered

60 See Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.61 See Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.62 Amendment of the Commission’s Rules to Establish Part 27, the Wireless Communications Service (WCS), Report and Order, 12 FCC Rcd 10785, 10879, para. 194 (1997).63 See Letter from Aida Alvarez, Administrator, SBA, to Amy Zoslov, Chief, Auctions and Industry Analysis Division, Wireless Telecommunications Bureau, FCC (filed Dec. 2, 1998) (Alvarez Letter 1998).64 13 CFR § 121.201 (NAICS code 517210).65 13 CFR § 121.201 (NAICS code 517210).66 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.67 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.






74

to a third party, such as cable systems or direct-to-home satellite systems, for transmission to viewers.68 The SBA has established a size standard for this industry stating that a business in this industry is small if it has 1,500 or fewer employees.69 The 2012 Economic Census indicates that 367 firms were operational for that entire year. Of this total, 357 operated with less than 1,000 employees.70 Accordingly we conclude that a substantial majority of firms in this industry are small under the applicable SBA size standard.

26. Cable Companies and Systems (Rate Regulation). The Commission has developed its own small business size standards for the purpose of cable rate regulation. Under the Commission's rules, a “small cable company” is one serving 400,000 or fewer subscribers nationwide.71 Industry data indicate that there are currently 4,600 active cable systems in the United States.72 Of this total, all but eleven cable operators nationwide are small under the 400,000-subscriber size standard.73 In addition, under the Commission's rate regulation rules, a “small system” is a cable system serving 15,000 or fewer subscribers.74 Current Commission records show 4,600 cable systems nationwide. Of this total, 3,900 cable systems have fewer than 15,000 subscribers, and 700 systems have 15,000 or more subscribers, based on the same records.75 Thus, under this standard as well, we estimate that most cable systems are small entities.

27. Cable System Operators (Telecom Act Standard). The Communications Act also contains a size standard for small cable system operators, which is “a cable operator that, directly or through an affiliate, serves in the aggregate fewer than 1% of all subscribers in the United States and is not affiliated with any entity or entities whose gross annual revenues in the aggregate exceed $250,000,000.”76 There are approximately 52,403,705 cable video subscribers in the United States today.77 Accordingly, an operator serving fewer than 524,037 subscribers shall be deemed a small operator if its annual revenues, when combined with the total annual revenues of all its affiliates, do not exceed $250 million in the aggregate.78 Based on available data, we find that all but nine incumbent cable operators are small entities under this size standard.79 The Commission neither requests nor collects information on whether cable system operators are affiliated with entities whose gross annual revenues exceed $250

68 See U.S. Census Bureau, 2012 NAIC Definition, https://www.census.gov/cgi-bin/sssd/naics/naicsrch?input=515210&search=2012+NAICS+Search&search=2012 (last visited June 20, 2017) ( 2012 NAICS code, “515210 Cable and Other Subscription Programming”) .69 13 CFR § 121.201 (NAICSs Code 515210). 70 See U.S. Census Bureau, American Fact Finder (Jan 08, 2016), https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table (NAICS code 51510, “Estab & Firm Size: Employment Size of Establishments for the U.S.”). 71 47 CFR § 76.901(e).72This figure was derived from an August 15, 2015 report from the FCC Media Bureau, based on data contained in the Commission’s Cable Operations and Licensing System (COALS). See http://www.fcc.gov/coals.73 Data obtained from SNL Kagan database on April 19, 2017. 74 47 CFR § 76.901(c).75 August 5, 2015 report from the FCC Media Bureau based on its research in COALS. See http://www.fcc.gov/coals.76 47 CFR § 76.901(f) & nn.1-3.77 See SNL Kagan at http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx (subscription required). 78 47 CFR § 76.901(f) & nn.1-3.79 See SNL Kagan at http://www.snl.com/interactivex/TopCable MSOs.aspx (subscription required).





http://www.fcc.gov/coals


http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx

http://www.snl.com/interactivex/TopCable%20MSOs.aspx


75

million.80 Although it seems certain that some of these cable system operators are affiliated with entities whose gross annual revenues exceed $250 million, we are unable at this time to estimate with greater precision the number of cable system operators that would qualify as small cable operators under the definition in the Communications Act.

28. All Other Telecommunications. “All Other Telecommunications” is defined as follows: This U.S. industry is comprised of establishments that are primarily engaged in providing specialized telecommunications services, such as satellite tracking, communications telemetry, and radar station operation. This industry also includes establishments primarily engaged in providing satellite terminal stations and associated facilities connected with one or more terrestrial systems and capable of transmitting telecommunications to, and receiving telecommunications from, satellite systems. Establishments providing Internet services or voice over Internet protocol (VoIP) services via client-supplied telecommunications connections are also included in this industry.81 The SBA has developed a small business size standard for “All Other Telecommunications,” which consists of all such firms with gross annual receipts of $32.5 million or less.82 For this category, census data for 2012 show that there were 1,442 firms that operated for the entire year. Of these firms, a total of 1,400 had gross annual receipts of less than $25 million.83 Consequently, we estimate that the majority of All Other Telecommunications firms are small entities that might be affected by our action.

E. Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements for Small Entities

29. Recordkeeping and Reporting. The rule revisions adopted in the Order include changes that will require electing rate-of-return carriers receiving fixed universal service support to make various revisions to their business data service tariffs. For example, rate-of-return carriers receiving fixed support that elect incentive regulation will be required to file Tariff Review Plans and incentive regulation tariffs for their lower capacity TDM BDS. Packet-based BDS and higher capacity TDM BDS end user channel termination and lower capacity TDM BDS end user channel terminations offered by electing carriers in study areas deemed competitive by a competitive market test will be relieved of ex ante pricing regulation and will be subject to permissive detariffing for a period of 36 months at which time they will be subject to mandatory detariffing.

30. The Commission also incorporates a productivity factor (X-factor) of 2.0% and GDP-PI as the inflation factor used to adjust price cap indexes in the first year of incentive regulation, and each year thereafter for electing carriers. Electing carriers will be required to revise their rates and tariff review plans for business data services in filings with the Commission to reflect the new X-factor. Finally, the Commission grants forbearance from the requirement in section 54.1305 of our rules annually to report unseparated loop costs and other accounting data to NECA.

F. Steps Taken to Minimize the Significant Economic Impact on Small Entities and Significant Alternatives Considered

31. The RFA requires an agency to describe any significant alternatives that it has considered in reaching its proposed approach, which may include (among others) the following four alternatives:

80 The Commission does receive such information on a case-by-case basis if a cable operator appeals a local franchise authority’s finding that the operator does not qualify as a small cable operator pursuant to section 76.901(f) of the Commission’s rules. See 47 CFR § 76.901(f).81 U.S. Census Bureau, NAICS Search, http://www.census.gov/cgi-bin/sssd/naics/naicsrch (last visited June 21, 2017) (enter 2012 NAICS code 517919).82 13 CFR § 121.201 (NAICS Code 517919).83 U.S. Census Bureau, American Fact Finder (Jan. 08, 2016), http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ4&prodType=table (2012 NAICS Code 517919, “Estab & Firm Size: Receipts Size of Firms for the U.S.”).





76

(1) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance or reporting requirements under the rule for small entities; (3) the use of performance, rather than design, standards; and (4) an exemption from coverage of the rule, or any part thereof, for small entities.84

32. Incentive Regulation. In the Order, the Commission sheds burdensome rate-of-return regulation in favor of lighter touch incentive regulation for electing carriers’ lower capacity TDM transport and end user channel termination services. Additionally, the Commission adopted the proposal in the Notice to grant pricing flexibility to electing carriers’ lower capacity TDM transport and end user channel termination services under incentive regulation similar to the pricing flexibility the Commission granted to price cap carriers’ lower capacity TDM end user channel terminations in areas deemed non-competitive in the BDS Order. The pricing flexibility available to electing carriers, most of which are small entities, will enable them to sell their BDS using contract tariffs and term and volume discounts, enhancing their ability to respond to competition.

33. Competitive Market Test. The Commission sought comment on four options for a competitive market test for electing rate-of-return carriers that receive fixed support. The option we selected is one of the least burdensome options and relies on existing Form 477 data, avoiding any additional burdensome data collection. We did not adopt the proposal to use both prongs of the BDS Order competitive market test to assess the competitiveness of study areas served by rate-of-return carriers that receive fixed support despite its apparent simplicity because we found methodological and conceptual flaws in the proposal and in the study submitted by Petitioners to support the proposal. Among the flaws the Commission identified is that the study does not claim to be based on a representative sample of model-based rate-of-return carriers that receive fixed support, the study compares non-urbanized price cap areas with model-based rate-of-return areas that in some instances include urbanized areas, and some of the relevant counties included in the study were deemed non-competitive by the price cap competitive market test . Further, the Commission declined to adopt the other two options from the Notice which would have required costly, time consuming, burdensome data collections. Instead, the Order found that the record supports adopting the second option from the Notice which uses the second prong of the BDS Order competitive market test that is based on Form 477 data. As a result, ex ante pricing regulation of lower capacity TDM end user channel terminations will no longer apply in study areas served by rate-of-return carriers that receive fixed support that are deemed competitive.

34. Packet-based and Higher Capacity TDM Business Data Services. The Commission removed ex ante pricing regulation for electing rate-of-return carriers’ packet-based and higher capacity TDM business data services and directed electing carriers to detariff these services following a transition period. This action is consistent with the Commission’s preference to minimize the burdens of regulation.

35. X-factor. Rate-of-return carriers that receive fixed support that elect incentive regulation are required to file revised annual access charge tariffs every year, which become effective on July 1. The annual filings include submission of tariff review plans that are used to support revisions to the rates, including revisions that pertain to the X-factor. To ease the burden on the industry in connection with this filing, and because base period demand and the value of GDP-PI reflected in the price cap indices typically are not updated during a tariff year, the Commission permits electing carriers to use, in their filings implementing the 2.0% X-factor, the same base period demand and value of GDP-PI as in the prior year’s annual filing.

36. Periodic Revision to Competitive Market Test. Related to the competitive market test proposal, the Commission also proposed future periodic data collections to allow for market test updates for determining competitive and non-competitive areas. The periodic collections could have resulted in a significant reporting burden on small entities. Instead, the Commission adopted a process for updating

84 5 U.S.C. § 603(c).


77

the competitive market test every three years using the data from Form 477 that is already routinely filed by providers and thus entails no additional recordkeeping or reporting burden.

37. Forbearance. The Commission granted forbearance, pursuant to section 10 of the Act, from the Cost Assignment Rules for electing carriers, subject to the requirement relating to the calculation of pole attachment rates. The Commission found that the Cost Assignment Rules are no longer necessary to ensure that charges and practices are just, reasonable, and not unjustly or unreasonably discriminatory; to protect consumers; and to protect the public interest. The Commission found that the rules were no longer necessary for carriers converting to incentive regulation and that eliminating unnecessary regulation will generally reduce providers’ costs and provide a more level playing field because other providers of similar services are not subject to these requirements.

38. Detariffing. To minimize economic impact, the Commission provides a transition period to provide electing rate-of-return carriers that receive fixed support with sufficient time to detariff their business data services. The Commission does not intend its actions to disturb existing contractual or other long-term arrangements, which it grandfathered and which continue to remain in effect for the length of the contract.

G. Report to Congress

39. The Commission will send a copy of the Report and Order, including this FRFA, in a report to be sent to Congress pursuant to the Congressional Review Act.85 In addition, the Commission will send a copy of the Report and Order, including this FRFA, to the Chief Counsel for Advocacy of the SBA. A copy of the Order and FRFA (or summaries thereof) will also be published in the Federal Register.

85 See 5 U.S.C. § 801(a)(1)(A).


78

APPENDIX D

Initial Regulatory Flexibility Analysis

1. As required by the Regulatory Flexibility Act of 1980, as amended (RFA),1 the Commission has prepared this Initial Regulatory Flexibility Analysis (IRFA) of the possible significant economic impact on small entities by the policies and rules proposed in this Second Further Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking (FNPRMs). The Commission requests written public comments on this IRFA. Comments must be identified as responses to the IRFA and must be filed by the deadlines for comments provided on the first page of the Order and FNPRMs. The Commission will send a copy of the FNPRMs, including this IRFA, to the Chief Counsel for Advocacy of the Small Business Administration (SBA).2 In addition, the FNPRMs and IRFA (or summaries thereof) will be published in the Federal Register.3

A. Need for, and Objectives of, the Proposed Rules

2. In the FNPRMs, we propose changes to, and seek comment on, the appropriate regulatory treatment of TDM transport business data services (BDS) offerings offered by both price cap carriers and certain rate-of-return carriers that receive fixed universal service support and elect incentive regulation. In the FNPRMs, the Commission proposes to remove ex ante pricing regulation from TDM transport business data services offered by price cap carriers and seeks comment on doing so for rate-of-return carriers.4

B. Legal Basis

3. The legal basis for any action that may be taken pursuant to the FNPRMs is contained in sections 1, 4(i), 10, and 201(b) of the Communications Act of 1934, as amended, 47 U.S.C. §§ 151, 154(i), 160, and 201(b).

C. Description and Estimate of the Number of Small Entities to Which the Proposed Rules Will Apply

4. The RFA directs agencies to provide a description of, and where feasible, an estimate of the number of small entities that may be affected by the proposed rules and by the rule revisions on which the FNPRMs seek comment, if adopted.5 The RFA generally defines the term “small entity” as having the same meaning as the terms “small business,” “small organization,” and “small governmental jurisdiction.”6 In addition, the term “small business” has the same meaning as the term “small-business concern” under the Small Business Act.7 A “small-business concern” is one which: (1) is independently

1 See 5 U.S.C. § 603. The RFA, see 5 U.S.C. § 601 – 612, has been amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).2 See 5 U.S.C. § 603(a).3 See 5 U.S.C. § 603(a).4 Business Data Services in an Internet Protocol Environment; Technology Transitions; Special Access for Price Cap Local Exchange Carriers; AT&T Corporation Petition for Rulemaking to Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services, WC Docket No. 16-143, GN Docket No. 13-5, WC Docket No. 05-25, RM-10593, Report and Order, 32 FCC Rcd 3459 (2017) (BDS Order). 5 See 5 U.S.C. § 603(b)(3).6 See 5 U.S.C. § 601(6).7 5 U.S.C. § 601(3) (incorporating by reference the definition of “small-business concern” in the Small Business Act, 15 U.S.C. § 632). Pursuant to 5 U.S.C. § 601(3), the statutory definition of a small business applies “unless an agency, after consultation with the Office of Advocacy of the Small Business Administration and after opportunity


79

owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the SBA.8

1. Total Small Entities

5. Small Businesses, Small Organizations, Small Governmental Jurisdictions. Our actions, over time, may affect small entities that are not easily categorized at present. We therefore describe here, at the outset, three broad groups of small entities that could be directly affected herein.9 First, while there are industry specific size standards for small businesses that are used in the regulatory flexibility analysis, according to data from the SBA’s Office of Advocacy, in general a small business is an independent business having fewer than 500 employees.10 These types of small businesses represent 99.9% of all businesses in the United States which translates to 28.8 million businesses.11

6. Next, the type of small entity described as a “small organization” is generally “any not-for-profit enterprise which is independently owned and operated and is not dominant in its field.”12 Nationwide, as of August 2016, there were approximately 356,494 small organizations based on registration and tax data filed by nonprofits with the Internal Revenue Service (IRS).13

7. Finally, the small entity described as a “small governmental jurisdiction” is defined generally as “governments of cities, towns, townships, villages, school districts, or special districts, with a population of less than fifty thousand.”14 U.S. Census Bureau data from the 2012 Census of Governments15 indicates that there were 90,056 local governmental jurisdictions consisting of general purpose governments and special purpose governments in the United States.16 Of this number there were 37, 132

(Continued from previous page) for public comment, establishes one or more definitions of such term which are appropriate to the activities of the agency and publishes such definition(s) in the Federal Register.”8 See 15 U.S.C. § 632.9 See 5 U.S.C. § 601(3)-(6).10 See SBA, Office of Advocacy, “Frequently Asked Questions, Question 1 – What is a small business?” https://www.sba.gov/sites/default/files/advocacy/SB-FAQ-2016_WEB.pdf (June 2016).11 See SBA, Office of Advocacy, “Frequently Asked Questions, Question 2- How many small businesses are there in the U.S.?” https://www.sba.gov/sites/default/files/advocacy/SB-FAQ-2016_WEB.pdf (June 2016).12 5 U.S.C. § 601(4).13 Data from the Urban Institute, National Center for Charitable Statistics (NCCS) reporting on nonprofit organizations registered with the IRS was used to estimate the number of small organizations. Reports generated using the NCCS online database indicated that as of August 2016 there were 356,494 registered nonprofits with total revenues of less than $100,000. Of this number 326,897 entities filed tax returns with 65,113 registered nonprofits reporting total revenues of $50,000 or less on the IRS Form 990-N for Small Exempt Organizations and 261,784 nonprofits reporting total revenues of $100,000 or less on some other version of the IRS Form 990 within 24 months of the August 2016 data release date. See http://nccs.urban.org/sites/all/nccs-archive/html//tablewiz/tw.php where the report showing this data can be generated by selecting the following data fields: Report: “The Number and Finances of All Registered 501(c) Nonprofits”; Show: “Registered Nonprofits”; By: “Total Revenue Level (years 1995, Aug to 2016, Aug)”; and For: “2016, Aug” then selecting “Show Results”.14 5 U.S.C. § 601(5).15 See 13 U.S.C. § 161. The Census of Government is conducted every five (5) years compiling data for years ending with “2” and “7”. See also Program Description Census of Government https://factfinder.census.gov/faces/affhelp/jsf/pages/metadata.xhtml?lang=en&type=program&id=program.en.COG#.16 U.S. Census Bureau, Statistical Abstract of the United States: 2012 at 267, Table 428 (2011), http://www2.census.gov/library/publications/2011/compendia/statab/131ed/2012-statab.pdf (citing data from 2007).



http://nccs.urban.org/sites/all/nccs-archive/html/tablewiz/tw.php

https://factfinder.census.gov/faces/affhelp/jsf/pages/metadata.xhtml?lang=en&type=program&id=program.en.COG

https://factfinder.census.gov/faces/affhelp/jsf/pages/metadata.xhtml?lang=en&type=program&id=program.en.COG

http://www2.census.gov/library/publications/2011/compendia/statab/131ed/2012-statab.pdf


80

general purpose governments (county17, municipal and town or township18) with populations of less than 50,000 and 12,184 special purpose governments (independent school districts19 and special districts20) with populations of less than 50,000. The 2012 U.S. Census Bureau data for most types of governments in the local government category shows that the majority of these governments have populations of less than 50,000.21 Based on these data we estimate that at least 49,316 local government jurisdictions fall in the category of “small governmental jurisdictions.”22

2. Broadband Internet Access Service Providers

8. Internet Service Providers (Broadband). Broadband Internet service providers include wired (e.g., cable, DSL) and VoIP service providers using their own operated wired telecommunications infrastructure fall in the category of Wired Telecommunication Carriers.23 Wired Telecommunications Carriers are comprised of establishments primarily engaged in operating and/or providing access to transmission facilities and infrastructure that they own and/or lease for the transmission of voice, data, text, sound, and video using wired telecommunications networks. Transmission facilities may be based on a single technology or a combination of technologies.24 The SBA size standard for this category classifies a business as small if it has 1,500 or fewer employees.25 U.S. Census data for 2012 show that there were 3,117 firms that operated that year. Of this total, 3,083 operated with fewer than 1,000 employees.26 Consequently, under this size standard the majority of firms in this industry can be considered small.

17 See U.S. Census Bureau, 2012 Census of Governments, County Governments by Population-Size Group and State: 2012 - United States-States. https://factfinder.census.gov/bkmk/table/1.0/en/COG/2012/ORG06.US01. There were 2,114 county governments with populations less than 50,000. 18 See U.S. Census Bureau, 2012 Census of Governments, Subcounty General-Purpose Governments by Population-Size Group and State: 2012 - United States – States. https://factfinder.census.gov/bkmk/table/1.0/en/COG/2012/ORG07.US01. There were 18,811 municipal and 16,207 town and township governments with populations less than 50,000. 19 See U.S. Census Bureau, 2012 Census of Governments, Elementary and Secondary School Systems by Enrollment-Size Group and State: 2012 - United States-States. https://factfinder.census.gov/bkmk/table/1.0/en/COG/2012/ORG11.US01. There were 12,184 independent school districts with enrollment populations less than 50,000.20 See U.S. Census Bureau, 2012 Census of Governments, Special District Governments by Function and State: 2012 - United States-States. https://factfinder.census.gov/bkmk/table/1.0/en/COG/2012/ORG09.US01. The U.S. Census Bureau data did not provide a population breakout for special district governments.21 See U.S. Census Bureau, 2012 Census of Governments, County Governments by Population-Size Group and State: 2012 - United States-States - https://factfinder.census.gov/bkmk/table/1.0/en/COG/2012/ORG06.US01; Subcounty General-Purpose Governments by Population-Size Group and State: 2012 - United States–States - https://factfinder.census.gov/bkmk/table/1.0/en/COG/2012/ORG07.US01; and Elementary and Secondary School Systems by Enrollment-Size Group and State: 2012 - United States-States. https://factfinder.census.gov/bkmk/table/1.0/en/COG/2012/ORG11.US01. While U.S. Census Bureau data did not provide a population breakout for special district governments, if the population of less than 50,000 for this category of local government is consistent with the other types of local governments the majority of the 38, 266 special district governments have populations of less than 50,000.22 Id. 23 See, 13 CFR § 121.201. The Wired Telecommunications Carrier category formerly used the NAICS code of 517110. As of 2017 the U.S. Census Bureau definition show the NAICs code as 517311. See, https://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517311&search=2017 24 Id.25 Id.26 http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml? pid=ECN_2012_US_51SSSZ2&prodType=table.

https://factfinder.census.gov/bkmk/table/1.0/en/COG/2012/ORG06.US01







https://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517311&search=2017




81

3. Wireline Providers

9. Wired Telecommunications Carriers. The U.S. Census Bureau defines this industry as “establishments primarily engaged in operating and/or providing access to transmission facilities and infrastructure that they own and/or lease for the transmission of voice, data, text, sound, and video using wired communications networks. Transmission facilities may be based on a single technology or a combination of technologies. Establishments in this industry use the wired telecommunications network facilities that they operate to provide a variety of services, such as wired telephony services, including VoIP services, wired (cable) audio and video programming distribution, and wired broadband internet services. By exception, establishments providing satellite television distribution services using facilities and infrastructure that they operate are included in this industry.”27 The SBA has developed a small business size standard for Wired Telecommunications Carriers, which consists of all such companies having 1,500 or fewer employees.28 Census data for 2012 show that there were 3,117 firms that operated that year. Of this total, 3,083 operated with fewer than 1,000 employees.29 Thus, under this size standard, the majority of firms in this industry can be considered small.

10. Incumbent Local Exchange Carriers (Incumbent LECs). Neither the Commission nor the SBA has developed a small business size standard specifically for incumbent LEC services. The closest applicable size standard under SBA rules is for the category Wired Telecommunications Carriers as defined above. Under that size standard, such a business is small if it has 1,500 or fewer employees.30 According to Commission data, 3,117 firms operated in that year. Of this total, 3,083 operated with fewer than 1,000 employees.31 Consequently, the Commission estimates that most providers of incumbent local exchange service are small businesses that may be affected by the rules and policies adopted. A total of 1,307 firms reported that they were incumbent local exchange service providers.32 Of this total, an estimated 1,006 have 1,500 or fewer employees.33

11. Competitive Local Exchange Carriers (Competitive LECs), Competitive Access Providers (CAPs), Shared-Tenant Service Providers, and Other Local Service Providers. Neither the Commission nor the SBA has developed a small business size standard specifically for these service providers. The appropriate NAICS Code category is Wired Telecommunications Carriers, as defined above. Under that size standard, such a business is small if it has 1,500 or fewer employees.34 U.S. Census data for 2012 indicate that 3,117 firms operated during that year. Of that number, 3,083 operated

27 U.S. Census Bureau, NAICS Search, http://www.census.gov/cgi-bin/sssd/naics/naicsrch (last visited June 21, 2017)28 13 CFR § 121.201 (NAICS Code 517110).29 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016) http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.30 13 CFR § 121.201 (NAICS Code 517110).31 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016) http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.32 See Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf. 33 See Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.34 13 CFR § 121.201 (NAICS Code 517110).









82

with fewer than 1,000 employees.35 Based on this data, the Commission concludes that the majority of Competitive LECS, CAPs, Shared-Tenant Service Providers, and Other Local Service Providers, are small entities. According to Commission data, 1,442 carriers reported that they were engaged in the provision of either competitive local exchange services or competitive access provider services.36 Of these 1,442 carriers, an estimated 1,256 have 1,500 or fewer employees.37 In addition, 17 carriers have reported that they are Shared-Tenant Service Providers, and all 17 are estimated to have 1,500 or fewer employees.38 Also, 72 carriers have reported that they are Other Local Service Providers.39 Of this total, 70 have 1,500 or fewer employees.40 Consequently, based on internally researched FCC data, the Commission estimates that most providers of competitive local exchange service, competitive access providers, Shared-Tenant Service Providers, and Other Local Service Providers are small entities.

12. We have included small incumbent LECs in this present RFA analysis. As noted above, a “small business” under the RFA is one that, inter alia, meets the pertinent small business size standard (e.g., a telephone communications business having 1,500 or fewer employees), and “is not dominant in its field of operation.”41 The SBA’s Office of Advocacy contends that, for RFA purposes, small incumbent LECs are not dominant in their field of operation because any such dominance is not “national” in scope.42 We have therefore included small incumbent LECs in this RFA analysis, although we emphasize that this RFA action has no effect on Commission analyses and determinations in other, non-RFA contexts.

13. Interexchange Carriers (IXCs). Neither the Commission nor the SBA has developed a definition for Interexchange Carriers. The closest NAICS Code category is Wired Telecommunications Carriers as defined above. The applicable size standard under SBA rules is that such a business is small if it has 1,500 or fewer employees.43 U.S. Census data for 2012 indicates that 3,117 firms operated during that year. Of that number, 3,083 operated with fewer than 1,000 employees.44 According to internally developed Commission data, 359 companies reported that their primary telecommunications service

35 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016) http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.36 See Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.37 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.38 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.39 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.40 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.41 5 U.S.C. § 601(3).42 Letter from Jere W. Glover, Chief Counsel for Advocacy, SBA, to William E. Kennard, Chairman, FCC (filed May 27, 1999). The Small Business Act contains a definition of “small business concern,” which the RFA incorporates into its own definition of “small business.” 15 U.S.C. § 632(a); 5 U.S.C. § 601(3). SBA regulations interpret “small business concern” to include the concept of dominance on a national basis. 13 CFR § 121.102(b).43 13 CFR § 121.201 (NAICS Code 517110).44 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016), http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.











83

activity was the provision of interexchange services.45 Of this total, an estimated 317 have 1,500 or fewer employees.46 Consequently, the Commission estimates that the majority of IXCs are small entities that may be affected by our proposed rules.

14. Local Resellers. The SBA has developed a small business size standard for the category of Telecommunications Resellers. The Telecommunications Resellers industry comprises establishments engaged in purchasing access and network capacity from owners and operators of telecommunications networks and reselling wired and wireless telecommunications services (except satellite) to businesses and households. Establishments in this industry resell telecommunications; they do not operate transmission facilities and infrastructure. Mobile virtual network operators (MVNOs) are included in this industry.47 Under that size standard, such a business is small if it has 1,500 or fewer employees.48 Census data for 2012 show that 1,341 firms provided resale services during that year. Of that number, all operated with fewer than 1,000 employees.49 Thus, under this category and the associated small business size standard, the majority of these prepaid calling card providers can be considered small entities.

15. Toll Resellers. The Commission has not developed a definition for Toll Resellers. The closest NAICS Code Category is Telecommunications Resellers. The Telecommunications Resellers industry comprises establishments engaged in purchasing access and network capacity from owners and operators of telecommunications networks and reselling wired and wireless telecommunications services (except satellite) to businesses and households. Establishments in this industry resell telecommunications; they do not operate transmission facilities and infrastructure. Mobile virtual network operators (MVNOs) are included in this industry.50 The SBA has developed a small business size standard for the category of Telecommunications Resellers.51 Under that size standard, such a business is small if it has 1,500 or fewer employees.52 Census data for 2012 show that 1,341 firms provided resale services during that year. Of that number, 1,341 operated with fewer than 1,000 employees.53 Thus, under this category and the associated small business size standard, the majority of these resellers can be considered small entities. According to Commission data, 881 carriers have

45 See Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.46 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.47 U.S. Census Bureau, 2012 NAICS Definition, https://www.census.gov/cgi-bin/sssd/naics/naicsrch?input=517911&search=2012+NAICS+Search&search=2012 (last visited Mar. 26, 2018).48 13 CFR § 121.201 (NAICS code 517911).49 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016), http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table (last visited Mar. 26, 2018). 50 U.S. Census Bureau, 2012 NAICS Definition, https://www.census.gov/cgi-bin/sssd/naics/naicsrch?input=517911&search=2012+NAICS+Search&search=2012 (last visited June 20, 2017) (NAICS 517911 Telecommunications Resellers).51 13 CFR § 121.201 (NAICS code 517911).52 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016), http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.53 U.S. Census Bureau, American Fact Finder (Jan. 08, 2016), http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.














84

reported that they are engaged in the provision of toll resale services.54 Of this total, an estimated 857 have 1,500 or fewer employees.55 Consequently, the Commission estimates that the majority of toll resellers are small entities.

16. Other Toll Carriers. Neither the Commission nor the SBA has developed a definition for small businesses specifically applicable to Other Toll Carriers. This category includes toll carriers that do not fall within the categories of interexchange carriers, operator service providers, prepaid calling card providers, satellite service carriers, or toll resellers. The closest applicable NAICS Code category is for Wired Telecommunications Carriers as defined above. Under the applicable SBA size standard, such a business is small if it has 1,500 or fewer employees.56 Census data for 2012 show that there were 3,117 firms that operated that year. Of this total, 3,083 operated with fewer than 1,000 employees.57 Thus, under this category and the associated small business size standard, the majority of Other Toll Carriers can be considered small. According to internally developed Commission data, 284 companies reported that their primary telecommunications service activity was the provision of other toll carriage.58 Of these, an estimated 279 have 1,500 or fewer employees.59 Consequently, the Commission estimates that most Other Toll Carriers are small entities that may be affected by rules adopted pursuant to the Second Further Notice.

17. Operator Service Providers (OSPs). Neither the Commission nor the SBA has developed a small business size standard specifically for operator service providers. The appropriate size standard under SBA rules is for the category Wired Telecommunications Carriers. Under that size standard, such a business is small if it has 1,500 or fewer employees.60 According to Commission data, 33 carriers have reported that they are engaged in the provision of operator services. Of these, an estimated 31 have 1,500 or fewer employees and two have more than 1,500 employees.61 Consequently, the Commission estimates that the majority of OSPs are small entities.

4. Wireless Providers – Fixed and Mobile

18. Wireless Telecommunications Carriers (except Satellite). This industry comprises establishments engaged in operating and maintaining switching and transmission facilities to provide communications via the airwaves. Establishments in this industry have spectrum licenses and provide services using that spectrum, such as cellular services, paging services, wireless internet access, and wireless video services.62 The appropriate size standard under SBA rules is that such a business is small

54 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.55 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.56 13 CFR § 121.201 (NAICS code 517110).57 See U.S. Census Bureau, American Fact Finder (Jan. 08, 2016), http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table.58 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.59 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.60 13 CFR § 121.201, NAICS code 517311.61 Trends in Telephone Service, tbl. 5.3.62 See U.S. Census Bureau, American Fact Finder—About the Data, https://factfinder.census.gov/faces/affhelp/jsf/pages/metadata.xhtml?lang=en&type=ib&id=ib.en./ECN.NAICS2012.517210 (NAICS Code 517210).










85

if it has 1,500 or fewer employees.63 For this industry, U.S. Census data for 2012 show that there were 967 firms that operated for the entire year.64 Of this total, 955 firms had employment of 999 or fewer employees and 12 had employment of 1000 employees or more.65 Thus under this category and the associated size standard, the Commission estimates that the majority of wireless telecommunications carriers (except satellite) are small entities.

19. The Commission’s own data—available in its Universal Licensing System—indicate that, as of October 25, 2016, there are 280 Cellular licensees that will be affected by our actions today.66 The Commission does not know how many of these licensees are small, as the Commission does not collect that information for these types of entities. Similarly, according to internally developed Commission data, 413 carriers reported that they were engaged in the provision of wireless telephony, including cellular service, Personal Communications Service, and Specialized Mobile Radio Telephony services.67 Of this total, an estimated 261 have 1,500 or fewer employees, and 152 have more than 1,500 employees.68 Thus, using available data, we estimate that the majority of wireless firms can be considered small.

20. Wireless Communications Services. This service can be used for fixed, mobile, radiolocation, and digital audio broadcasting satellite uses. The Commission defined “small business” for the wireless communications services (WCS) auction as an entity with average gross revenues of $40 million for each of the three preceding years, and a “very small business” as an entity with average gross revenues of $15 million for each of the three preceding years.69 The SBA has approved these definitions.70

21. Wireless Telephony. Wireless telephony includes cellular, personal communications services, and specialized mobile radio telephony carriers. As noted, the SBA has developed a small business size standard for Wireless Telecommunications Carriers (except Satellite).71 Under the SBA small business size standard, a business is small if it has 1,500 or fewer employees.72 According to

63 13 CFR § 121.201 (NAICS code 517210). 64 U.S. Census Bureau, American Fact Finder (Jan 08, 2016), https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table (NAICS 51720, “Subject Series - Estab & Firm Size: Employment Size of Establishments for the U.S.: 2012”).65 U.S. Census Bureau, American Fact Finder (Jan 08, 2016), https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table (NAICS 51720, “Subject Series - Estab & Firm Size: Employment Size of Establishments for the U.S.: 2012”). Available census data do not provide a more precise estimate of the number of firms that have employment of 1,500 or fewer employees; the largest category provided is for firms with “1000 employees or more.”66 See Fed. Commc’ns Comm’n, Universal Licensing System, http://wireless.fcc.gov/uls (last visited June 20, 2017). For the purposes of this FRFA, consistent with Commission practice for wireless services, the Commission estimates the number of licensees based on the number of unique FCC Registration Numbers. 67 See Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.68 See Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.69 Amendment of the Commission’s Rules to Establish Part 27, the Wireless Communications Service (WCS), Report and Order, 12 FCC Rcd 10785, 10879, para. 194 (1997).70 See Letter from Aida Alvarez, Administrator, SBA, to Amy Zoslov, Chief, Auctions and Industry Analysis Division, Wireless Telecommunications Bureau, FCC (filed Dec. 2, 1998) (Alvarez Letter 1998).71 13 CFR § 121.201 (NAICS code 517210).72 13 CFR § 121.201 (NAICS code 517210).





http://wireless.fcc.gov/uls




86

Commission data, 413 carriers reported that they were engaged in wireless telephony.73 Of these, an estimated 261 have 1,500 or fewer employees and 152 have more than 1,500 employees.74 Therefore, a little less than one third of these entities can be considered small.

5. Cable Service Providers

22. Because section 706 requires us to monitor the deployment of broadband using any technology, we anticipate that some broadband service providers may not provide telephone service. Accordingly, we describe below other types of firms that may provide broadband services, including cable companies, MDS providers, and utilities, among others.

23. Cable and Other Subscription Programming. This industry comprises establishments primarily engaged in operating studios and facilities for the broadcasting of programs on a subscription or fee basis. The broadcast programming is typically narrowcast in nature (e.g. limited format, such as news, sports, education, or youth-oriented). These establishments produce programming in their own facilities or acquire programming from external sources. The programming material is usually delivered to a third party, such as cable systems or direct-to-home satellite systems, for transmission to viewers.75 The SBA has established a size standard for this industry stating that a business in this industry is small if it has 1,500 or fewer employees.76 The 2012 Economic Census indicates that 367 firms were operational for that entire year. Of this total, 357 operated with less than 1,000 employees.77 Accordingly we conclude that a substantial majority of firms in this industry are small under the applicable SBA size standard.

24. Cable Companies and Systems (Rate Regulation). The Commission has developed its own small business size standards for the purpose of cable rate regulation. Under the Commission's rules, a “small cable company” is one serving 400,000 or fewer subscribers nationwide.78 Industry data indicate that there are currently 4,600 active cable systems in the United States.79 Of this total, all but eleven cable operators nationwide are small under the 400,000-subscriber size standard.80 In addition, under the Commission's rate regulation rules, a “small system” is a cable system serving 15,000 or fewer subscribers.81 Current Commission records show 4,600 cable systems nationwide. Of this total, 3,900 cable systems have fewer than 15,000 subscribers, and 700 systems have 15,000 or more subscribers,

73 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.74 Fed. Commc’ns Comm’n, Trends in Telephone Service, 5-5, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf.75 See U.S. Census Bureau, 2012 NAIC Definition, https://www.census.gov/cgi-bin/sssd/naics/naicsrch?input=515210&search=2012+NAICS+Search&search=2012 (last visited June 20, 2017) ( 2012 NAICS code, “515210 Cable and Other Subscription Programming”) .76 13 CFR § 121.201 (NAICSs Code 515210). 77 See U.S. Census Bureau, American Fact Finder (Jan 08, 2016), https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ2&prodType=table (NAICS code 51510, “Estab & Firm Size: Employment Size of Establishments for the U.S.”). 78 47 CFR § 76.901(e).79This figure was derived from an August 15, 2015 report from the FCC Media Bureau, based on data contained in the Commission’s Cable Operations and Licensing System (COALS). See http://www.fcc.gov/coals.80 Data obtained from SNL Kagan database on April 19, 2017. 81 47 CFR § 76.901(c).









87

based on the same records.82 Thus, under this standard as well, we estimate that most cable systems are small entities.

25. Cable System Operators (Telecom Act Standard). The Communications Act also contains a size standard for small cable system operators, which is “a cable operator that, directly or through an affiliate, serves in the aggregate fewer than 1% of all subscribers in the United States and is not affiliated with any entity or entities whose gross annual revenues in the aggregate exceed $250,000,000.”83 There are approximately 52,403,705 cable video subscribers in the United States today.84 Accordingly, an operator serving fewer than 524,037 subscribers shall be deemed a small operator if its annual revenues, when combined with the total annual revenues of all its affiliates, do not exceed $250 million in the aggregate.85 Based on available data, we find that all but nine incumbent cable operators are small entities under this size standard.86 The Commission neither requests nor collects information on whether cable system operators are affiliated with entities whose gross annual revenues exceed $250 million.87 Although it seems certain that some of these cable system operators are affiliated with entities whose gross annual revenues exceed $250 million, we are unable at this time to estimate with greater precision the number of cable system operators that would qualify as small cable operators under the definition in the Communications Act.

26. All Other Telecommunications. “All Other Telecommunications” is defined as follows: This U.S. industry is comprised of establishments that are primarily engaged in providing specialized telecommunications services, such as satellite tracking, communications telemetry, and radar station operation. This industry also includes establishments primarily engaged in providing satellite terminal stations and associated facilities connected with one or more terrestrial systems and capable of transmitting telecommunications to, and receiving telecommunications from, satellite systems. Establishments providing Internet services or voice over Internet protocol (VoIP) services via client-supplied telecommunications connections are also included in this industry.88 The SBA has developed a small business size standard for “All Other Telecommunications,” which consists of all such firms with gross annual receipts of $32.5 million or less.89 For this category, census data for 2012 show that there were 1,442 firms that operated for the entire year. Of these firms, a total of 1,400 had gross annual receipts of less than $25 million.90 Consequently, we estimate that the majority of All Other Telecommunications firms are small entities that might be affected by our action.

82 August 5, 2015 report from the FCC Media Bureau based on its research in COALS. See http://www.fcc.gov/coals.83 47 CFR § 76.901(f) & nn.1-3.84 See SNL Kagan at http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx (subscription required). 85 47 CFR § 76.901(f) & nn.1-3.86 See SNL Kagan at http://www.snl.com/interactivex/TopCable MSOs.aspx (subscription required). 87 The Commission does receive such information on a case-by-case basis if a cable operator appeals a local franchise authority’s finding that the operator does not qualify as a small cable operator pursuant to section 76.901(f) of the Commission’s rules. See 47 CFR § 76.901(f).88 U.S. Census Bureau, NAICS Search, http://www.census.gov/cgi-bin/sssd/naics/naicsrch (last visited June 21, 2017) (enter 2012 NAICS code 517919).89 13 CFR § 121.201 (NAICS Code 517919).90 U.S. Census Bureau, American Fact Finder (Jan. 08, 2016), http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_51SSSZ4&prodType=table (2012 NAICS Code 517919, “Estab & Firm Size: Receipts Size of Firms for the U.S.”).


http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx

http://www.snl.com/interactivex/TopCable%20MSOs.aspx





88

D. Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements for Small Entities

27. The FNPRMs propose changes to, and seeks comment on, the Commission’s regulatory treatment of lower capacity TDM transport business data services offered by price cap and certain rate-of-return carriers. The objective of the proposed modifications is to reduce the unnecessary regulatory burdens and inflexibility of BDS regulation for both price cap and rate-of-return carriers, which are for the most part small businesses, when competition justifies reduced regulation. These proposed rule modifications would provide additional incentives for competitive entry, network investment and the migration to IP-based network technologies and services.

28. Specifically, the FNPRMs propose to eliminate ex ante pricing regulation and tariffing requirements for price cap carriers’ TDM transport BDS. This will eliminate reporting, recordkeeping, and other compliance requirements for any price cap carrier. They also seek comment on whether to remove ex ante pricing regulation and tariffing requirements of TDM transport services offered by rate-of-return carriers that received fixed universal service support and elect incentive regulation. This change would impact the reporting, recordkeeping, and other compliance requirements for certain rate-of-return carriers, nearly all of which are small entities.

E. Steps Taken to Minimize the Significant Economic Impact on Small Entities, and Significant Alternatives Considered

29. The RFA requires an agency to describe any significant alternatives that it has considered in reaching its proposed approach, which may include the following four alternatives (among others): (1) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance and reporting requirements under the rules for such small entities; (3) the use of performance rather than design standards; and (4) an exemption from coverage of the rule, or any part thereof, for such small entities.91

30. The rule changes proposed by the FNPRMs would reduce the economic impact of the Commission’s rules on price cap carriers and rate-of-return carriers that elect incentive regulation in the following ways. The Second Further Notice of Proposed Rulemaking proposes to free price cap carriers from ex ante pricing regulation for their TDM transport offerings, including the requirement to tariff their TDM transport services. The Further Notice of Proposed Rulemaking seeks comment on whether the Commission should do the same for TDM transport offered by rate-of-return carriers that received fixed universal support, or if the Commission should adopt a competitive market test for these carriers’ TDM transport services. These rule changes would represent alternatives to the Commission’s current rules that would significantly minimize the economic impact of those rules on price cap carriers and electing rate-of-return carriers. Finally, we seek comment as to any additional economic burden incurred by small entities that may result from the rule changes proposed in the FNPRMs.

F. Federal Rules that May Duplicate, Overlap, or Conflict with the Proposed Rules

31. None.

91 5 U.S.C. § 603(c)(1)-(c)(4).


89

STATEMENT OFCHAIRMAN AJIT PAI

Re: Regulation of Business Data Services for Rate-of-Return Local Exchange Carriers, WC Docket No. 17-144; Business Data Services in an Internet Protocol Environment, WC Docket No. 16-143; Special Access for Price Cap Local Exchange Carriers, WC Docket No. 05-25.

In attracting infrastructure investment, as in catching flies, honey works better than vinegar. For too long, the FCC’s approach to regulating the market for dedicated enterprise services—what we call business data services—was vinegar-based, marked by price controls and other micromanagement. This started to change in the 1990s, as the FCC began to shift carriers’ regulated services away from burdensome, inefficient cost-based regulation to incentive regulation. The history since confirms the common-sense intuition that lighter-touch incentive regulation promotes deployment and competition.

Today, we continue to sweeten the regulatory landscape for infrastructure investment. In particular, we allow certain carriers to opt out of yesteryear’s rate-of-return regulations of business data services. For these carriers, such services may be their only offerings subject to such requirements, which means that they are forced through a regulatory gauntlet for just this part of their overall business—ironically a business that’s facing increasing competition throughout the country.

I’ll note as well that the incentive regulation framework to which we now allow certain rate-of-return carriers to transition matches relief we granted price cap carriers last year. And as we did back then, we apply a competitive market test and transition period to help ensure appropriate regulation and a smooth adjustment, respectively.

I was somewhat surprised to hear one of my colleague’s concerns about the analysis in this item at the open meeting today. That’s because during the six months that this proceeding has been open, she did not raise those concerns with my office or staff even once. Nonetheless, our staff conducted a thorough analysis of the record before recommending the approach we take today—and one that I support.

My thanks to the tremendously talented staff who worked on this item: Pamela Arluk, Irina Asoskov, Justin Faulb, Lisa Hone, William Kehoe, Christopher Koves, Richard Kwiatkowski, Kris Monteith, Belinda Nixon, Eric Ralph, Marvin Sacks, Douglas Slotten, Shane Taylor, and David Zesiger from the Wireline Competition Bureau; and Malena Barzilai, William Layton, Richard Mallen, and Linda Oliver from the Office of General Counsel.


90

STATEMENT OF COMMISSIONER MICHAEL O’RIELLY


In 2017, this Commission generally deregulated business data services for price cap carriers, relying on competitive markets to achieve better outcomes for enterprise consumers than our previous regulatory scheme would have allowed. Today, we further this effort by offering model-based rate-of-return carriers the option to convert their BDS offerings to incentive regulation and altogether eliminate ex ante pricing regulation for electing carriers’ high-speed services. While converting from rate-of-return regulation may not be the solution for every business, I anticipate that many carriers will be eager to take advantage of the opportunity to forego burdensome yearly cost studies and operate with greater investment flexibility.

The item has my strong support, although I might have directed electing carriers to set their initial rates at a lower rate of return. Since the transition to incentive regulation is voluntary, the fully-transitioned 9.75% rate of return designated in the 2016 Rate-of-Return Reform Order seemed appropriate. I am, however, grateful for the recirculated draft’s clarification that carriers electing during a second window would be required to set their rates according to the applicable rate of return in the year of their election.

Likewise, I am pleased by the decision to forbear from applying separations and other cost assignment rules to electing carriers. Thanks to regulatory and marketplace evolution, the process of separating regulated costs between interstate and intrastate jurisdictions has become increasingly irrelevant and unnecessary. With an additional subset of carriers no longer subject to the legacy rules, the case for comprehensive separations reform is weaker than ever. It is inappropriate to reopen that can of worms. Moreover, the forbearance we adopt here provides greater justification for the Commission’s proposal in a separate proceeding to provide a one-time opportunity for carriers to change their category elections and extend the separations freeze for a prolonged period—rather than to overhaul our separations rules for an ever-shrinking base.

Further, since re-categorizing is costly and burdensome, carriers themselves should decide whether to unfreeze and update their category relationships in establishing going-in rates. By leaving this choice up to electing carriers, this item advances the overall goal of reducing regulatory burdens for model-based BDS providers. Lastly, it should be noted that our actions in the item with respect to jurisdictional separations are completely consistent with the Commission’s authority, despite certain claims to the contrary.

I vote to approve.


91

STATEMENT OFCOMMISSIONER BRENDAN CARR


A few weeks ago, I had the chance to visit Morris, Minnesota, which is a small town just east of the South Dakota border. In fact, if you didn’t get off of Highway 9, you’d pass right by Morris before the next song came on the radio. When I was there, I visited with two of the largest job creators in the community.

One is a dairy farm that Brad and Krista help run. It started as a family farm 80 years ago, and today its employees own a large share of the operation and its thousand-strong herd of cattle. Broadband is now key to the operation. All of the cows have e-tags on their ears, which monitor vital signs and movement—which means, yes, we’re back to connected cows. And the employees now use smartphone apps and a Wi-Fi connection to fine tune everything from feeding regimes to the cow carousel that lets workers milk dozens of cows while they go by on their seven-minute circle around the room.

Later, I toured a manufacturing plant in Morris that employs about 800 people. The company’s skilled workforce produces steel conveyors and storage tanks for the energy industry. As their CEO Micah walked me around the plant floor, he said that the business and its hundreds of good-paying jobs simply would not be in Morris without a high-speed broadband connection.

So when we talk about getting more broadband to more Americans, we need to keep in mind the broader economic benefits and jobs that broadband brings to small towns like Morris. Our Universal Service Program is a key part of the solution in communities like this—communities where low population densities and high deployment costs erode the private sector business case. By continuing to provide sufficient and predictable support, we will help encourage deployment where it is needed most.

And by modernizing the rules for carriers that receive USF support, we can provide the right incentives for carriers to bring broadband to homes and businesses in the hardest-to-serve parts of the country. Today’s decision is a good example of that. For “BDS,” or the types of broadband services often purchased by businesses, the Order allows smaller, rural providers to transition to less burdensome, incentive-based regulation. Doing so would eliminate the need for expensive cost studies and tariff filings as well as compliance with cost assignment and separations rules. The resulting savings can then be passed along to consumers or invested in new networks. And this could make a real difference for businesses in Morris and across rural America.

So I want to thank the staff of the Wireline Competition Bureau for their work on this item. It has my support.


92

STATEMENT OFCOMMISSIONER JESSICA ROSENWORCEL, CONCURRING


Business data services are an essential part of the digital economy. These high-capacity dedicated services sustain our wireless networks, facilitate commercial transactions, and support communications that American businesses rely on every day.

Here, in a grab bag of decisionmaking and rulemaking, the Federal Communications Commission updates its business data services policies to respond to a court remand and address issues for a subset of carriers that have opted into new, model-based universal service support.

While I support the outcome of today’s decision, I concur because its analytical shortcomings are real. Instead of conducting analysis about the state of the market, this order just draws parallels “where we can.” In doing so, it borrows analysis from an earlier decision involving much larger carriers with far greater economies of scale and determines for smaller providers “the same circumstances could exist” in rural areas. But there is no data to demonstrate the truth of this assertion. In other words, we take it on faith that price cap and rate-of-return areas have competitive characteristics that merit identical regulatory treatment despite years of history that suggest the contrary.

I like faith. I like hope. But I don’t think they suffice as a regulatory policy. I think data should be at the center of everything we do—so when we reform our policies to reflect changing times and technologies our work is supported by evidence on the ground. Here, we miss that mark, so I respectfully concur.